Deleveraged Floater

DEFINITION of 'Deleveraged Floater'

A fixed-income instrument with a floating coupon rate that is a product of the reference interest rate, or index, and a leverage factor of less than one, plus a fixed margin. The deleveraged floater gets its name from the fact that its coupon rate is a fraction of the reference interest rate. If the leverage factor is greater than one, the instrument would be a leveraged floater. The reference rate used for such floaters is usually a widely referenced benchmark such as LIBOR, treasury rate or the federal funds rate.

BREAKING DOWN 'Deleveraged Floater'

The coupon rate for a deleveraged floater is calculated as follows:


(Reference Interest Rate x Leverage Factor) + Fixed Margin.


As an example, consider a deleveraged floater with quarterly coupon payments based on the federal funds rate and a leverage factor of 0.6, with a margin of 1%. At the time of the first coupon payment, if the federal funds rate is 4%, the coupon rate on this deleveraged floater would be 3.4%. If the federal funds rate is 3% at the time of the next coupon reset, the coupon rate would now be 2.8%.

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