DEFINITION of Deleveraged Floater
A deleveraged floater fixed-income instrument that pays a floating coupon rate that is a product of three market factors. The first is the reference interest rate. The second is a leverage factor that is less than one. The third is a fixed margin. The deleveraged floater gets its name from the fact that its coupon rate is a fraction of the reference interest rate. If the leverage factor is greater than one, the instrument would be a leveraged floater. The reference rate used for such floaters is usually a widely referenced benchmark such as LIBOR, a treasury rate, or the federal funds rate.
BREAKING DOWN Deleveraged Floater
A deleveraged floater pays a floating coupon rate that is based upon three factors.
The coupon rate for a deleveraged floater is calculated as follows:
(Reference Interest Rate x Leverage Factor) + Fixed Margin.
Example of Deleveraged Floater
Consider a deleveraged floater with quarterly coupon payments based on the federal funds rate and a leverage factor of 0.6, with a margin of 1%. At the time of the first coupon payment, if the federal funds rate is 4%, the coupon rate on this deleveraged floater would be 3.4%. If the federal funds rate is 3% at the time of the next coupon reset, the coupon rate would now be 2.8%.