Inverse floating rate note

An inverse floating rate note is like lending someone money, but the amount you get paid back changes depending on something else called an interest rate. Imagine you have a piggy bank and you loan your friend money to buy a toy. Your friend promises to give you back your money, plus a little extra every month. Normally, the extra money your friend pays you is a fixed amount, but with an inverse floating rate note it changes.

Here's where the interest rate comes in. This is like the price tag on your toy in the store. It tells you how much it costs to borrow money. If the interest rate is high, then it's more expensive for your friend to borrow money, so the extra money they give you to pay back the loan goes down. If the interest rate is low, then it's cheaper for your friend to borrow money, so the extra money they pay you to pay back the loan goes up.

So, let's say your friend borrowed money from you with an inverse floating rate note. At first, the interest rate is high, so your friend pays you a little extra money every month. Then, the interest rate goes down, so your friend doesn't have to pay as much extra money back to you. The amount they pay you changes because of the interest rate – it's "inverse" because when the interest rate goes up, the extra money they pay you goes down, and when the interest rate goes down, the extra money they pay you goes up.