Super Floater Definition

What is a Super Float?

A super float is a secured mortgage bond (CMO) tranche whose coupon rate is the leveraged reference interest rate, generally LIBORminus the fixed rate (spread).

Key points to remember

  • A super float is a tranche of secured mortgage bond (CMO) whose coupon rate is the leveraged benchmark interest rate, usually LIBOR, minus the fixed (spread) rate.
  • Super floats amplify variations in the benchmark interest rate, which is why they are often used to hedge interest rate risk in portfolios.
  • Super floats can offer very high returns when interest rates rise or their coupon income can quickly erode in response to falling interest rates, known as prepayment risk.

Understanding the Super Float

Super floats are like floats, except that the floats are only linked to the underlying interest rate, instead of being a multiple of it. Since the super floats coupon rate floats according to a formula based on a multiple of an underlying index, it increases or decreases by more than one basis point for each increase or decrease of one basis point in the index. To prevent the coupon rate from becoming negative, super floats often have a floor on the coupon.

Super floats become interest rate sensitive securities because they amplify any change in the interest rate or benchmark. However, this is also why they are often used to cover interest rate risk in wallets. Super floats offer low base yields, but can offer very high yields when interest rates rise. Conversely, coupon income can be quickly eroded when mortgage prepayments accelerate in response to falling interest rates, known as prepayment risk.

For example, take a super floater with the following coupon formula:

  • 2x (one-year USD LIBOR) – 4%.
  • If the one-year LIBOR is 3%, the coupon rate would be 2 * 3% – 4% = 2%.
  • If LIBOR rose to 4%, the coupon rate would be 2 * 4% – 4% = 4%, even though the benchmark rate only increased by 1%.

All types of floating rate tranches can be structured as planned depreciation class (PAC), target damping class (TAC) – which offer fixed principal payment schedules –side dish slices Where Pay Sequential CMO.

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