If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always:
A) remain constant at the average of the floor and cap rates.
B) remain constant at the floor rate.
C) remain constant at the cap rate.
D) be higher than, or equal to, the cap but lower than, or equal to, the floor.
E) be higher than, or equal to, the floor but lower than, or equal to, the cap.

Question

Quizplus · Accepted Answer

An interest rate collar creates a range or band within which the interest rate for the variable rate loan will fluctuate. The floor is the minimum interest rate the firm will pay, and the cap is the maximum interest rate it will pay. Therefore, the firm's rate will always be higher than, or equal to, the floor but lower than, or equal to, the cap.

If a Firm Creates an Interest Rate Collar on a Variable