Interest Rate Floor

AAA

DEFINITION of 'Interest Rate Floor'

An over-the-counter investment instrument that protects the floor buyer from losses resulting from a decrease in interest rates. The floor seller compensates the buyer with a payoff when the reference interest rate falls below the floor's strike rate.

INVESTOPEDIA EXPLAINS 'Interest Rate Floor'

For example, assume that an investor is securing a floating rate loan and is looking for protection against lost income that would arise if interest rates were to decline. Suppose the floor rate is 8% and that on a particular day, the rate on the investor's floating-rate loan of $1 million is 7%. The floor provides a payoff of $10,000 (($1 million *.08) - ($1 million*.07)).

RELATED TERMS
  1. Floating-Rate Note - FRN

    A note with a variable interest rate. The interest rate is usually ...
  2. Over-The-Counter Market

    A decentralized market, without a central physical location, ...
  3. Floortion

    A type of option that gives the holder the right, but not the ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Interest Rate Ceiling

    The maximum interest rate that a financial institution can charge ...
  6. Interest Rate Options

    An investment tool whose payoff depends on the future level of ...
Related Articles
  1. Forces Behind Interest Rates
    Economics

    Forces Behind Interest Rates

  2. What Investors Should Know About Interest ...
    Investing Basics

    What Investors Should Know About Interest ...

  3. Banquo’s Grain And U.S. Interest Rates
    Economics

    Banquo’s Grain And U.S. Interest Rates

  4. The Better Inflation Hedge: Gold or ...
    Investing News

    The Better Inflation Hedge: Gold or ...

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center