An FI Has Purchased an Agency Security That Is an Inverse

question 58

Multiple Choice

An FI has purchased an agency security that is an inverse floater at 9 percent minus LIBOR. Which of the following characteristics reflect this type of asset?

• A)If LIBOR is 4 percent, the asset will pay 5 percent to the investor.
• B)As LIBOR increases, the investor will receive a lower return on the security.
• C)The agency issuing this security may convert it into a LIBOR liability by entering into a swap agreement.
• D)If the FI funded the asset at LIBOR, and LIBOR reaches 10 percent, the FI will have a negative 10 percent spread on the asset.
• E)All of the options.

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Definitions:

Retained Earnings

Profits that have been reinvested in a company rather than paid out to shareholders as dividends, typically used for business growth or debt payment.

Plant Expansion

Plant expansion involves increasing the capacity or efficiency of a company’s production facilities, often requiring significant capital investment and strategic planning.

Earnings Per Share

A financial metric that shows the portion of a company's profit allocated to each outstanding share of common stock.

Return on Investment

A performance measure used to evaluate the efficiency or profitability of an investment compared to its cost.