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 ... 
Interest Rate Ceiling
The maximum interest rate that a financial institution can charge ... 
Price Ceiling
The maximum price a seller is allowed to charge for a product ... 
Debt Ceiling
The maximum amount of monies the United States can borrow. The ... 
Interest Rate Floor
An overthecounter investment instrument that protects the floor ...

Options & Futures
Managing Interest Rate Risk
Learn which tools you need to manage the risk that comes with changing rates. 
Options & Futures
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. 
Options & Futures
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. 
Options & Futures
Market Volatility Strategy: Collars
Find out which protective or bullish collar will result in your optimal risk/return level. 
Investing Basics
Managing Interest Rate Risk
Interest rate risk stems from the possibility that an interestbearing assetâ€™s value will change due to changing interest rates. 
Stock Analysis
How To Protect Your Profits for Free
Here's a situation every investor faces sooner or later... Imagine you are sitting on solid profits from a stock you foresee climbing higher. But then a little bad news hits the newswire, sending ... 
Economics
What's a Price Ceiling?
A price ceiling is the maximum amount a seller can charge for a product or service. 
Credit & Loans
Do You Need A Debt Ceiling?
Debt ceilings may not be right for everyone, but they can be a useful tool. 
Options & Futures
How Interest Rates Affect The U.S. Markets
Interest rates can have both positive and negative effects on U.S. stocks, bonds and inflation. 
Fundamental Analysis
Diversifying A Concentrated Stock Position
Having stocks in one area exposes an investor to risk. We tell you four ways to minimize it.

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 >>