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) will pay the holder the LIBOR interest above 10%.
D) will pay the holder the LIBOR interest below the 10%.

Question

Quizplus · Accepted Answer

Purchasing a cap at 10% means that the holder will receive the difference between the LIBOR interest rate and 10%, so if LIBOR is above 10%, they will receive the difference as payment. It does not limit borrowing or pay the firm a set amount.

If a Firm Purchases a Cap at 10% This Will