If a firm purchases a cap at 10% this will:

Question

Quizplus · Accepted Answer

Purchasing a cap at 10% means that the holder of the cap will receive compensation in the form of the LIBOR interest rate that exceeds 10%. This compensation is designed to limit the firm's exposure to rising interest rates while still allowing for borrowing at a variable rate. Choice A is incorrect because purchasing a cap does not limit the amount of borrowing, it simply limits the interest rate risk associated with borrowing. Choice B is incorrect because the cap does not pay the firm, it pays the holder of the cap. Choice D is incorrect because the holder of the cap would prefer to receive a higher LIBOR interest rate, not a lower one. Choice E is incorrect because one of the options is correct.

If a Firm Purchases a Cap at 10% This Will