Under an interest rate cap, the seller, in return for a fee, promises to compensate the buyer

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Under an interest rate cap, the seller, in return for a fee, promises to compensate the buyer should interest rates rise above a certain level. If rates rise much more than expected, the cap seller may have an incentive to default to truncate the losses. Thus, selling a cap is similar to a bank’s selling interest rate risk insurance (see Chapter 10 for more details). LO.1

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Financial Markets And Institutions

ISBN: 9781259919718

7th Edition

Authors: Anthony Saunders, Marcia Cornett

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