Legal Definitions - inverse-floating-rate note

An inverse-floating-rate note is a type of promissory 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, these notes are considered risky investments because if interest rates rise, the securities lose their value and their coupon earnings fall.

For example, if an investor buys an inverse-floating-rate note with an interest rate of 5% and the underlying index goes up by 1%, the interest rate on the note will go down to 4%. If the index goes down by 1%, the interest rate on the note will go up to 6%. This type of note is often used by investors who want to speculate on interest rate movements.