If a firm sells a floor at 6% this will:
A) will pay the holder the LIBOR interest below the 6%.
B) pay the firm 6% on their purchase.
C) will pay the holder the LIBOR interest above 6%.
D) limit the amount of borrowing to 6% of assets.

Question

Quizplus · Accepted Answer

A floor contract in finance is a derivative agreement where the seller agrees to pay the buyer the difference between the interest rate and a predefined rate (the floor rate) if the interest rate falls below that level. In this case, if the firm sells a floor at 6%, it means that if the LIBOR (a benchmark interest rate) falls below 6%, the firm (as the seller of the floor) will pay the holder the difference between the LIBOR and 6%, effectively ensuring the holder receives a minimum interest equivalent to the floor rate.

If a Firm Sells a Floor at 6% This Will