16. Structured Notes

The Frugal Finance online courses offer structured guidance on various aspects of structured notes, which are tailored debt instruments designed to attract investors, often in conjunction with derivative positions. One notable example discussed is the inverse floater, which exhibits a yield pattern inversely related to fluctuations in interest rates. Despite their unique payoff structures, issuers typically hedge their risks using derivatives. These courses enable investors to capitalize on interest rate predictions, manage current and future yields, express market opinions, and adjust risk levels as required.

Inverse Floater

The structured notes course covers detailed details into specific types of structured notes, such as the inverse floater. Also referred to as a reverse floater or bull FRN, the inverse floater’s payoff behavior opposes that of a floating reference rate, appealing to those optimistic about bond prices. Using all-encompassing examples and analyses, students learn a deeper understanding of how inverse floaters operate, including their connection to SOFR fluctuations and the incorporation of options to control interest payments. In addition, the course looks at the creation of synthetic inverse floaters using derivatives, offering perspectives from both issuers and investors on these intricate financial instruments.

Bear Floater

Another focal point of the course series is the bear floater, a type of floating-rate note designed to profit from increasing interest rates, reflecting a pessimistic outlook on bond prices. Similar to the inverse floater, the bear floater can be issued independently or alongside derivative positions to mitigate interest rate risks. With its high floating rate compared to a fixed rate, the bear floater’s yield escalates more rapidly than market rates during interest rate hikes, potentially yielding gains. Using tactical combinations with interest rate swaps, issuers can streamline their financial commitments by converting exposure to that of a standard fixed-rate bond. Conversely, investors can create synthetic bear floaters by strategically blending debt instruments and swaps, leveraging market perspectives. The course highlights the operational efficiency of market students in structuring these financial products, despite their complex nature.