If a firm purchases a cap at 10% this will:
A)limit the amount of borrowing to 10% of assets.
B)pay the firm 10% on their purchase.
C)pay the holder the LIBOR interest above 10%.
D)pay the holder the LIBOR interest below the 10%.
E)None of the above.

Question

Quizplus · Accepted Answer

A cap is a financial instrument that is used to limit the maximum interest rate that can be charged on a floating rate loan. If a firm purchases a cap at 10%, it means that the holder of the cap will receive payments if the floating rate interest exceeds 10%. Therefore, the correct choice is C which states that the holder will receive the LIBOR interest above 10%.

If a Firm Purchases a Cap at 10% This Will