The interest payment (coupon) on an inverse floater; the floater offers a coupon that increases when interest rates fall and decreases when interest rates rise. The coupon rate is given as:
Coupon rate = K – L * (R)
Where K is the inverse cap (the maximum coupon rate that can be realized by the floater) and L is the coupon leverage (a multiple by which the coupon rate will change in reaction to a 100 basis point change in R, the reference rate, such as LIBOR). For example, if L is 3, the coupon rate will change 300 basis points for each 100 basis point change in LIBOR.
The formula for the coupon rate of an inverse floater can be re-written as:
Coupon rate = inverse cap – leverage * reference rate
