Super Floater

A super floater is a collateralized mortgage obligation (CMO) tranche with a coupon that floats according to a formula based on a multiple of an underlying index or interest rate such as LIBOR, minus a stated spread. This means that the coupon is leveraged because it moves up or down by more than one basis point for each basis point increase or decrease in the index.

Super floaters are like floaters, except floaters are only linked to the underlying interest rate, rather than being a multiple of it. They become interest rate sensitive securities, because they magnify any change in the reference interest rate or index. However, this is also why they are often used to hedge interest rate risk in portfolios.

Super floaters offer low base case yields, but can offer very high yields when interest rates rally. Conversely, coupon income can be rapidly eroded when mortgage prepayments speed up in response to falling interest rates — which is known as prepayment risk.

For example, take a super floater with the following coupon formula: 2 x (one-year US$ LIBOR) - 4%. If one-year LIBOR is 3%, the coupon rate would be 2 x 3% - 4% = 2%. To prevent the coupon rate from getting negative, super floaters often have a floor rate on the coupon.

All types of floating-rate tranches may be structured as planned amortization class (PAC), targeted amortization class (TAC) — which offer fixed principal payment schedules — companion tranches or sequential pay CMOs.