In relation to floaters and inverse floaters (and other similar floating rate instruments such as inverse floating-rate CMO), it is the amount by which a reference rate is multiplied to determine the floating interest rate payable by the instrument. Specific debt instruments leverage the effects of interest rate changes to allow the holders to receive better potential coupon payments. In calculation, the floating rate of a floating rate instrument is calculated as follows:

Floating rate = fixed rate – (leverage factor × reference rate)

The leverage factor is a multiple by which the coupon rate will change in reaction to a change of 100 basis points (1%) in interest rates. In other words, this multiple reflects is the ratio by which the coupon rate will change when the base rate increases or decreases (moves either way) by 100 basis points (bps).

For example, if the coupon leverage is two, the inverse floater’s coupon rate will decrease by 200 bps when the reference rate increases by 100 bps. Inverse floaters with a coupon leverage larger than one are known as leveraged inverse floaters (leveraged inverse FRN).

It is also referred to as a coupon leverage.