The Falkland Cheese Company has a variable rate loan with an interest rate collar. The company is assured that the interest rate will:
A) Not increase above a stated rate and will decrease in direct proportion to changes in the discount rate.
B) Both increase and decrease in direct proportion to changes in the discount rate.
C) Increase in direct proportion to changes in the discount rate but remain above a stated rate.
D) Not increase above a stated rate nor fall below a stated rate.
E) Never change from the initial rate.

Question

Quizplus · Accepted Answer

An interest rate collar is a financial derivative that companies use to hedge against interest rate fluctuations. It sets both a maximum (cap) and a minimum (floor) interest rate. This ensures that the interest rate on a variable rate loan will not increase above the cap or fall below the floor, as described in option D.

The Falkland Cheese Company Has a Variable Rate Loan with an Interest