Question

Is having a cap on an inverse floating rate bond beneficial to bondholder or the issuer? Explain in detail please.

Answer 1

Capping of an inverse floating rate will be beneficial to the bondholder because it will mean that when the interest rates will be going up in the economy, the bond will be paying lower interest rate and when the interest rates will be going down in the economy, the bond will pay with higher interest rate but the direction to which the inverse relationship with the interest in the economy is capped, and hence it will be protecting bondholders from higher interest rate risk because it will be lowering the exposure of bondholder to substantial limits and these inverse rate floaters are exposing the risk of the bondholders to higher limits.

Hence, it will be helping the bond holder because it will lower the risk related to exposure with the interest rate risk.