Flip-Flop Note
What is Flip-Flop Note?
Flip-flop note is a fixed-income security, backed by two unique wellsprings of debt - one with a fixed interest rate and the other with a variable interest rate, that permits the holder to pick their payment stream.
Understanding Flip-Flop Note
A flip-flop note acts like a embedded option for investors. All in all, the holder of the flip-flop note might pick between a variable interest rate and a fixed interest rate, whichever has a higher yield for the period.
All flip-flop notes are technically debt securities which are pressed by two debt types. The variable interest rate is a rate on a loan or security which vacillates after some time due to its basis on an underlying benchmark or index that changes periodically. The fixed interest rate security pays a predefined rate of interest that doesn't change over the life of the instrument. Similarly as with some other fixed-income security, the face value of the flip-flop note is returned to the investor when the security arrives at it's maturity date.
Most flip-flop notes will limit when the holder will pick which interest rate is the basis for their interest payments.to specific dates. Flip-flopping between the two rates permits the holder to earn income from the interest rate in view of which type of debt is yielding more interest at the moment.
As indicated by the Dictionary of Financial Risk Management, a flip-flop note can likewise let the borrower shorten or stretch the term of the note in view of the sort of opportunities that are accessible on the note reset date. This feature implies the borrower doesn't get to pick the change in the interest rate in view of an impulse. All things being equal, it must happen when the bond's reset date is up. At the point when the reset date comes, the investor has the option to decide to stretch or shorten the term of the investment, whether it's a bond or a note, in view of the current interest rates.
Flip-Flop Note Example
For instance, an ordinary flip-flop note could be included a fixed-rated debt and a floating-coupon bond. Assuming that the floating interest rate dips under the fixed coupon, the investor can decide to receive income from the fixed-rate debt. On the other hand, while the floating rate surpasses the fixed coupon, the investor would switch to the floating-rate debt for income. In this situation, the flip-flop note is like a floating-rate bond with a interest rate floor.
A flip-flop note could likewise permit an investor to switch between two types of securities for their investment. For instance, a flip-flop note could be utilized to switch from a long-term bond to a short-term fixed-rate note or fixed security. At times, a flip-flop note can likewise be utilized to switch from notes to equities.
Features
- Most flip-flop notes will limit when the holder will pick which interest rate is the basis for their interest payments.to specific dates.
- Flip-flop note is a fixed-income security, backed by two distinct wellsprings of debt - one with a fixed interest rate and the other with a variable interest rate, that permits the holder to pick their payment stream.
- A flip-flop note acts like an embedded option for investors.
