What is...

Cap and Collar

Cap and Collar is a term used in connection with interest rates. A Cap is an upper limit, or maximum interest rate that will apply, while a Collar is the minimum interest rate. As such, the interest rate may vary between these two points. A capped interest rate is useful in uncertain economic environments as it can reduce the risk of interest rates increasing beyond affordability.

The actual interest rate charged can vary between the Cap and the Collar, but will never exceed the Cap, or fall below the Collar. This type of interest rate mechanism gives a borrower more certainty than a fully variable interest rate.

What is the Floor?

The Floor, in relation to Cap and Collar, is an interest rate minimum charge. A Cap is an upper limit, or maximum interest rate that will apply. A Collar is the lower limit, or minimum interest rate that will apply.

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