Interest Rate Cap And Floor
An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the LIBOR rate exceeds 2.5%.
Similarly an interest rate floor is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price.
Caps and floors can be used to hedge against interest rate fluctuations. For example a borrower who is paying the LIBOR rate on a loan can protect himself against a rise in rates by buying a cap at 2.5%. If the interest rate exceeds 2.5% in a given period the payment received from the derivative can be used to help make the interest payment for that period, thus the interest payments are effectively "capped" at 2.5% from the borrowers point of view.
Famous quotes containing the words floor, cap, rate and/or interest:
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The moon, wraps the bedpost in receding stillness....”
—Allen Tate (18991979)
“France, indeed! whose Catholic millions still worship Mary Queen of Heaven; and for ten generations refused cap and knee to many angel Maries, rightful Queens of France.”
—Herman Melville (18191891)
“All of us failed to match our dreams of perfection. So I rate us on the basis of our splendid failure to do the impossible.”
—William Faulkner (18971962)
“The cohort that made up the population boom is now grown up; many are in fact middle- aged. They are one reason for the enormous current interest in such topics as child rearing and families. The articulate and highly educated children of the baby boom form a huge, literate market for books on various issues in parenting and child rearing, and, as time goes on, adult development, divorce, midlife crisis, old age, and of course, death.”
—Joseph Featherstone (20th century)