Flip-Flop Note
Imagine a world in which we could buy bonds that were backed by two different debt types. Imagine that we could decide which of those debt types we wanted to be paid from: the one with the fixed interest rate or the one with the variable interest rate. And now imagine, in this world, this beautiful world, that we could change our preference to coincide with whichever debt type was going to earn us more money.
Friends, we don’t have to imagine anymore, because this world already exists. It’s the world of flip-flop notes, and it’s here to make our fixed-income security dreams come true.
Flip-flop notes work just as we described above: they allow us to choose how our debt security pays us. We can go with the variable rate if interest rates are high; we can switch to the fixed rate if interest rates drop and the fixed rate would be more profitable for us. Then, when the security matures, we get our principal back. (For those who were hoping “flip-flop notes” were some kind of musical footwear we could wear to the beach…no.) Sometimes we have specific date ranges in which we can flip or flop, but sometimes we can flip—or flop—whenever we feel like it.
Flip-flop notes might require a little more TLC than other fixed-income securities in our portfolio, because we’ve gotta pay attention to whether we want to be flipping or flopping at any given time. But when they yield us enough dough to finance taking our flip-flop game to the beach—we’re talking footwear and financials—then we feel like the extra time and attention will all have been worth it.
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Finance: What is the difference between ...6 Views
Finance allah shmoop what's the difference between a fixed and
a floating rate All right well we'll just start this
one out with your favorite time Donald and melania need
to borrow money to buy a building here's the history
of ten year t bill costs for the last few
decades Well rates were almost ten percent in the nineteen
seventies and then they fell all the way to being
almost free in two thousand eighteen Well if donald had
borrowed money nineteen eighty to buy a building with us
fixed rate he'd have had to pay about ten percent
interest for all this time That raid in nineteen eighty
was fixed and you know i'd be paying ten percent
for thirty five years very expensive rent on that money
It's not like a dog who can't you know have
pups different kind of fixed you know it's fixes in
he won't move Position is just a set number fixed
in place All right well donald would have overpaid massively
in his loans by paying ten percent interest when he
could have been paying seven percent here and four percent
here And maybe like two percent change here if the
loan he'd taken out in nineteen eighty was floating well
it would have floated downward along the way like that
Well most for floating loans have a preset set of
terms which move along with the rates of the fed
charges to loan money to banks who then mark up
the loans a bit and resell the money to really
borrowers like donald and kill you and me That is
the floating rate might be set at quote the average
federal funds rate plus ah hundred faces points over the
trailing six month period to be reset every month Unquote
Yeah something like that So in this case his rate
would have floated downward And obviously things can go the
other way as well Joe six pack it's a mortgage
for a home he can barely afford today Eight hundred
grand mortgage at four percent Well it cost him thirty
two grand a year to rent that money just the
interest and he has to make principal payments as well
So is total payments or something like forty grand a
year in year one of thirty Well if rates go
back up and they easily could and become say seven
Percent instead of that four percent a few years later
three four five years later Well then all of a
sudden his cost of renting that money goes from thirty
two grand a year in interest costs too something like
fifty or sixty grand a year in interest costs And
joe six pack because he didn't fix his raid at
that four percent figure when he borrowed it let things
float and well he ended up you know living in
his car when he couldn't afford paying The mortgage owns
home anymore and had to sell it And so yeah
he's living in his suv down by the river But 00:02:45.5 --> [endTime] luckily for him that suv floats