Inverse Floaters Definition & Meaning | Financial Term | CSIMarket
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Inverse Floaters

Financial Term

Inverse Floaters are a specific type of financial security that is primarily used by institutional investors, such as banks and hedge funds. These securities are created by splitting a pool of bonds or other debt obligations into two parts: a floating rate component and a fixed rate component. The fixed rate component is then sold to investors as an inverse floater security.

The inverse floater security pays a fixed interest rate that is equal to the difference between a fixed rate and a floating rate index, such as LIBOR. The floating rate component of the pool is then used to pay the interest on the fixed rate component.

Inverse floaters are typically used in situations where investors want to take advantage of a particular market condition, such as when interest rates are expected to fall. By purchasing an inverse floater, investors effectively bet that the floating rate component of the pool will decrease in value, which will increase the value of the fixed rate inverse floater.

Inverse floaters can also be used as a hedging tool by institutional investors who own a large portfolio of floating rate bonds or other debt obligations. By purchasing an inverse floater, the investor can hedge against a decrease in the value of the floating rate bonds.

Overall, inverse floaters are a complex and specialized financial instrument that is primarily used by institutional investors. While they can be an effective way to take advantage of specific market conditions or hedge against risk, they also carry a high degree of risk and are not suitable for all investors.


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