Asked by
Sittie Amina
on Nov 07, 2024
Verified
If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always:
A) Remain constant at the average of the floor and cap rates.
B) Remain constant at the floor rate.
C) Remain constant at the cap rate.
D) Be higher than, or equal to, the cap but lower than, or equal to, the floor.
E) Be higher than, or equal to, the floor but lower than, or equal to, the cap.
Interest Rate Collar
A financial derivative strategy used to hedge interest rate movements by setting upper and lower limits on interest payments.
Variable Rate Loan
A loan where the interest rate can change over time, based on an underlying benchmark or index.
Floor Rates
The minimum interest rate agreed upon in a financial contract, below which the rate cannot fall.
- Define and recognize the dynamics of interest rate collars and their use in interest rate risk management.
Verified Answer
BD
Learning Objectives
- Define and recognize the dynamics of interest rate collars and their use in interest rate risk management.