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.

---

Definitions:

Cash Dividends

Profits given to stockholders by a corporation, typically as a way to distribute earnings.

New Shares

Additional stock issued by a company, potentially diluting the ownership percentage of existing shareholders.

Dividend Income

Earnings obtained by holding company shares, typically dispensed from the firm's earnings.

Optimal Dividend Policy

The best strategy a company can adopt for the payment of dividends, balancing between retaining earnings for growth and satisfying shareholders.