- A Collar is an interest rate hedge combining the terms of an interest rate Cap and a Floor.
- The borrower purchases a Cap and simultaneously sells a Floor.
- The benefit of the Cap protects against rising rates.
- The sold Floor does not allow the variable rate to fall below the Floor level but often pays for the cost of the Cap resulting with no upfront fees to be paid by the borrower.
Interest Rate Collar
Features & Benefits
- When a variable rate sets above Cap rate the borrower pays the Cap rate.
- When the variable rate falls below the Floor rate the borrower pays the Floor rate.
- When the variable rate sets between the Cap rate and the Floor rate the borrower pays the variable rate.
- Borrower may be subject to potential prepayment charges should rates fall. However, should rates rise, a prepayment may result in a gain to the borrower.