Legal Definitions - inverse floater

An inverse floater is a type of note that has an interest rate that moves in the opposite direction from the underlying index, such as the London Interbank Offer Rate. This means that if the index goes up, the interest rate on the note goes down, and vice versa. However, inverse floaters are considered risky investments because if interest rates rise, the securities lose their value and their coupon earnings fall.

Suppose you buy an inverse floater note with an interest rate that is tied to the LIBOR. If the LIBOR goes up, the interest rate on your note will go down. For example, if the LIBOR goes up by 1%, the interest rate on your note might go down by 0.5%. This means that you will earn less interest on your investment. However, if the LIBOR goes down, the interest rate on your note will go up, and you will earn more interest.