What is an 'Interest Rate Collar'
An interest rate collar is an investment strategy that uses derivatives to hedge an investor's exposure to interest rate fluctuations. The investor purchases an interest rate ceiling for a premium, which is offset by selling an interest rate floor. This strategy protects the investor by capping the maximum interest rate paid at the collar's ceiling, but sacrifices the profitability of interest rate drops.
BREAKING DOWN 'Interest Rate Collar'
An interest rate collar can be an effective way of hedging interest rate risk associated with holding bonds. Since a bond's price falls when interest rates go up, the interest rate cap can guarantee a maximum decline in the bond's value. While interest rate floor does limit the potential appreciation of a bond given a decrease in rates, it provides upfront cash to help pay for the cost of the ceiling.
Let's say an investor enters a collar by purchasing a ceiling with a rate of 10% and sells a floor at 8%. Whenever the interest rate is above 10%, the investor will receive a payment from whoever sold the ceiling. If the interest rate drops to 7%, which is under the floor, the investor must now make a payment to the party that bought the floor.

Ceiling
The maximum level permissible in a financial transaction. Ceiling ... 
Zero Cost Collar
A type of positivecarry collar that secures a return through ... 
Price Ceiling
The maximum price a seller is allowed to charge for a product ... 
Collar
1. A protective options strategy that is implemented after a ... 
Interest Rate Ceiling
The maximum interest rate that a financial institution can charge ... 
Blue Collar
A workingclass person historically defined by hourly rates of ...

Managing Wealth
Managing Interest Rate Risk
Learn which tools you need to manage the risk that comes with changing rates. 
Investing
Minimize Risk With The Long Collar
Think your favorite stock is on the way down? This simple optiontrading strategy can help you manage your risks without selling the stock. 
Investing
Apple As An Example Of How a Protective Collar Works
We define a protective collar, using Apple (AAPL) as an example. A protective collar is a combination of a covered call plus long put position. 
Investing
Market Volatility Strategy: Collars
Find out which protective or bullish collar will result in your optimal risk/return level. 
Trading
Capitalize On Collars To Enhance Your Trades
Trade collaring measures current technicals and makes swift adjustments to account for environmental changes. 
Managing Wealth
Costless Collars: Because Asset Allocation Is Not Enough
Collars are extremely flexible, and can be much more beneficial to your portfolio than asset allocation. 
Insights
Blue Collar Vs. White Collar: Different Social Classes?
Learn about the implications of the words "blue collar" and "white collar" and the connotation each carries for social class and the type of labor performed. 
Investing
Using LEAPS With Collars
This options strategy will help you lock in profit while keeping your upside potential. 
Trading
Managing Interest Rate Risk
Interest rate risk stems from the possibility that an interestbearing asset’s value will change due to changing interest rates. 
Trading
How Does a Collar Work?
Collar refers to a protective options strategy that investors use after a stock has experienced substantial gains.

How is a short call used in a collar option strategy?
Learn how a short call is used in a collar option strategy, and see how this strategy has a limited risk and a limited return ... Read Answer >> 
What are the best options strategies for investing in the real estate sector?
Discover two popular options strategies that traders often use to enhance or protect profits when investing in the real estate ... Read Answer >> 
What are the advantages of using an effective interest rate figure?
Understand what is meant by the effective interest rate, and learn why the effective rate calculation is preferred over the ... Read Answer >> 
How can an investor reduce interest rate risk?
Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >> 
What is affected by the interest rate risk?
Find out more about interest rate risk, how bond prices are affected by interest rate fluctuations and how interest rate ... Read Answer >> 
What is the difference between real and nominal interest rates?
Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ... Read Answer >>