Super Floater

What is Super Floater?

A super floater is a collateralized mortgage obligation (CMO) tranche whose coupon rate is the leveraged reference interest rate, generally LIBOR, minus the fixed rate (spread).

Seeing Super Floater

Super floaters are like floaters, with the exception of floaters are simply linked to the underlying interest rate, as opposed to being a various of it. Since the super floaters coupon rate floats as per a formula based on a various of an underlying index, it goes up or down by more than one basis point for every basis point increase or lessening in the index. To prevent the coupon rate from getting negative, super floaters frequently have a floor rate on the coupon.

Super floaters become interest rate sensitive securities, since they amplify any change in the reference interest rate or index. Nonetheless, this is additionally why they are much of the time used to hedge interest rate risk in portfolios. Super floaters offer low base case yields, yet can offer extremely high yields when interest rates rally. Alternately, coupon income can be quickly dissolved when mortgage prepayments speed up in response to falling interest rates — which is known as prepayment risk.

For instance, take a super floater with the following coupon formula:

• 2 x (one-year US$ LIBOR) - 4%.
• On the off chance that one-year LIBOR is 3%, the coupon rate would be 2 * 3% - 4% = 2%.
• Assuming LIBOR ascends to 4%, the coupon rate would be 2 * 4% - 4% = 4%, even however the reference rate increased by just 1%.

A wide range of floating-rate tranches might be structured as planned amortization class (PAC), targeted amortization class (TAC) — which offer fixed principal payment plans — companion tranches or sequential pay CMOs.

Highlights

• A super floater is a collateralized mortgage obligation (CMO) tranche whose coupon rate is the leveraged reference interest rate, generally LIBOR, minus the fixed rate (spread).
• Super floaters can offer extremely high yields when interest rates rally or its coupon income can quickly disintegrate in response to falling interest rates — which is known as prepayment risk.
• Super floaters amplify changes in the reference interest rate, which is the reason they are much of the time used to hedge interest rate risk in portfolios.