Question

Given the following information, what is the maximum rate cap on the floating rate security? (Round to two decimal places; for example, if your answer is two and a quarter, enter 2.25.) •Floating rate security pays: LIBOR+35bp •Created from pool of FRM with WAC of 8% please show me all steps! •68M principal assigned to floater class • 32M principal assigned to inverse floater class

Answer 1

FRM	8%
Floater	68,000,000.00
Inverse Floater	32,000,000.00
Total	100,000,000.00
Floating rate	L + 35 bps
Cap Rate for Floater:
Total proceeds from FRM	8,000,000.00
For cap rate, assume all of the proceeds go towards Floater
So, Cap Rate	=8000000 / 68000000
	11.76%
Cap Rate for Inverse Floater:
Total proceeds from FRM	8,000,000.00
For Cap Rate on inverse, assume L = 0%
So, Payment towards floater = 0.35% * 68000000
	238,000.00
Payment towards Inverse Floater = 8000000 - 238000
	7,762,000.00
Cap Rate = 7762000 / 32000000
	24.26%