Leveraged Floater

DEFINITION of 'Leveraged Floater'

A security, generally a bond, which has a leverage factor of greater than one and a fixed margin with a variable coupon rate, which is tied to a benchmark interest rate or index. Generally speaking, the benchmark interest rate or index is well-known and widely quoted, i.e., the federal funds rate, treasury rate or LIBOR. A leveraged floater security has a coupon rate that increases or decreases by an amount greater than the benchmark rate or index it is associated with.

BREAKING DOWN 'Leveraged Floater'

The formula for figuring out the coupon rate of a leveraged floater is as follows:

Benchmark Interest Rate x Leverage Factor + Fixed Margin.

This is the same formula used to find the coupon rate of a deleveraged floater (only the leverage factor distinguishes one from the other). Hence, if one were to use the treasury rate standing at, say, 0.2%, a leverage factor of 1.3 and a margin of 1%, the coupon rate would be 1.26% (0.2% x 1.3 + 1%).

Trading Center