When a strategy is put in place to limit the rate of interest that a firm pays on its debt such that the rate will remain within a stated upper and lower bound, the firm is said to have created an interest rate:
A) Swap.
B) Floor.
C) Cap.
D) Ceiling.
E) Collar.

Question

Quizplus · Accepted Answer

An interest rate collar is a financial strategy that combines an interest rate cap and an interest rate floor to limit the range within which interest rates can fluctuate. This ensures that the interest rate a firm pays on its debt remains within a specified upper and lower bound, providing a hedge against interest rate volatility.

When a Strategy Is Put in Place to Limit the Rate