A floating-rate note (FRN) that typically pays 50% of a Constant- Maturity Treasury (CMS) rate plus a specific spread and under which a floor is placed. The coupon of a step-up recovery FRN is linked to the constant maturity treasuries (CMS) index rather than the shorter-term LIBOR. That is, the coupon payments are typically based on coupons provided by bonds with equivalent longer maturities. Therefore, this FRN allows investors to obtain exposure to short-term investments while taking advantage of a positive sloping yield curve. Step-up recovery FRNs provide higher returns to investors should the yield curve is upward-sloping and gaining more steepness.
A step-up recovery floating-rate note is also called a step-up recovery floater or for short a SURF.
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