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The impact of a modest downward shift in interest rates for an inverse floater is likely...

The impact of a modest downward shift in interest rates for an inverse floater is likely to be:

a/ A large increase in value

b/ A small increase in value

c/ Negligible difference

d/ A large decrease in value

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Answer #1

Since inverse floaters have higher duration it will have higher impact on value. In inverse floater decrease in interest rates increases the coupon rate hence the value increase.

Hence option a. A large increase in value

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