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.

Question

Quizplus · Accepted Answer

An interest rate collar involves setting a cap and floor on the interest rate on a loan. The firm's interest payments will not exceed the cap rate and will not fall below the floor rate, ensuring that the rate the firm pays is always at least the floor rate but no more than the cap rate.

If a Firm Creates an Interest Rate Collar on a Variable