Interest Rate Floor Language

Hedge with interest rate caps instead of swaps.

Interest rate floor language.

An interest rate cap is a type of interest rate 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 minimum interest rate that may be charged on a contract or agreement. Similarly an interest rate floor is a derivative contract in which the buyer receives payments at the end. Provided it makes economic sense for the relevant borrower to hedge with a cap this would be the simplest solution to the potential mismatch problem.

Falling rates in what is already a low interest rate environment are bringing renewed attention to lender rate floors. An interest rate floor reduces the risk to the bank or other party receiving the interest. 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. An interest rate floor is similar to an interest rate cap agreement.

The rate floor language added to the end of the definition typically says but if this rate is negative libor shall be zero for purposes of this credit agreement. An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. Choose fixed rate loans over floating rate loans with hedges. A zero floor is not an issue under an interest rate cap.