Interest Rate Floor Definition

Interest rate cap and floor definition.

Interest rate floor definition.

Floor rate means a per annum rate of interest i equal to three and seventy five hundredths of one percent 3 75. An interest rate floor reduces the risk to the bank or other party receiving the interest. An interest rate cap is a series of european call options or caplets on a specified interest rate usually the libor interest rate. Floors in pricing.

The buyer of the cap receives money if on the maturity of any of the caplets the reference rate exceeds the agreed strike price of the cap. Interest rate floors are utilized in derivative. And ii which the note rate hereinafter defined shall never be less than while any indebtedness under this note is outstanding. Interest rate collars and reverse collars.

For example an adjustable rate mortgage may have an interest rate floor stating that the rate will not go below 3 5 even if the formula used to calculate the interest rate would have it do so. This acts as protection for the buyer by ensuring that the interest rate for a product or loan does not drop below a specified rate. An interest rate floor is often present through the issuing of an adjustable rate mortgage arm as it prevents interest rates from adjusting below a preset level. An interest rate floor is similar to an interest rate cap agreement.

An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. An interest rate floor is a series of european put options or floorlets on a specified reference rate usually libor. The underlying rate is known as the reference rate. An interest rate collar uses interest rate options contracts to protect a borrower against rising interest rates while also setting a floor on declining interest rates.

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. The buyer of the floor receives money if on the maturity of any of the floorlets the reference rate is below the agreed strike price of the floor. The minimum interest rate that may be charged on a contract or agreement.