What is flip-flop note’
Flip flop note, is a type of fixed income security that allows its owner to choose the stream of payments from two different sources of debt. Flip-flop notes provide investors with two options of return, allowing them to choose the main debt with a higher return over the period. Broke even easier, flip flop note, investors can choose between two different types of debt. Flip flop note, is actually a built-in option for investors.
Breaking down the ‘flip-flop note’
All flip-flop notes: technically debt securities are Packed by two kinds of debt: one with a floating interest rate and fixed interest rate. This means that the physical person or legal entity that holds the flip flop note gets to choose what the interest rate should be used at any time. Flip-flop between the two rates allows the holder to earn income from interest rates based on what type of debt gives more interest at the moment.
According to the dictionary of financial risk management, flip flop note could also allow the borrower to shorten or lengthen the term of the note based on the capabilities available on the date of return. This means that the borrower does not get to choose the interest rate based on whim or wind; this should be done when the maturity of bonds up. If the return date comes, the investor has the opportunity to choose to lengthen or shorten the period of investment, be it bonds or notes, based on current interest rates.
An example of a flip flop note
For example, a typical flip-flop note could consist of a fixed nominal debt and floating coupon. If the floating interest rate falls below the fixed coupon, the investor may receive income from the debt with a fixed interest rate. Conversely, if the floating rate exceeds the fixed coupon, the investor will switch to floating rate debt by income. In this situation, flip flop note similar to floating rate bonds with an interest rate floor.
Flip flop note may also allow the investor to switch between the two types of securities for their investment; for example, flip flop note, can be used to switch from long-term bonds short-term fixed rate note or fixed. In some cases, flip flops, note, can also be used to move from note to stock.