An FI Has Purchased an Agency Security That Is an Inverse

question 62

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 above.

---

Definitions:

Need for Pickers

The demand for laborers who manually harvest crops or pick goods in industries such as agriculture or warehousing.

Competitive Industry

An industry in which many firms compete against each other to sell similar products or services.

Economic Profits

The gap between total income and the sum of all costs, covering both direct and indirect expenses.

Total Revenue

The entire amount of income generated by the sale of goods or services before any expenses are deducted.