A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

Question

Quizplus · Accepted Answer

A cap is a financial instrument that sets a maximum limit on the interest rate a borrower will have to pay on their variable-rate loan. This protection is useful in case interest rates rise, which could cause the borrower's payments to become unmanageable. A floor is a financial instrument that sets a minimum limit on the interest rate a borrower will pay, which would not be useful for protecting against interest rate increases. Walls, hats, and cloaks have nothing to do with financial instruments.

A ﬁRm with a Variable-Rate Loan Can Purchase an Interest