Periodic Interest Rate Cap

Definition of 'Periodic Interest Rate Cap'


A part of an interest rate cap structure on loans and mortgages. The periodic interest rate cap limits the amount by which the interest rate on an adjustable rate loan can adjust at specified adjustment dates. For example, an adjustable rate mortgage with a starting interest of 6%, an initial interest rate cap of 2% and a periodic interest rate cap of 2% could adjust upward no higher than 10%, or no lower than 2% at its second adjustment date. (This example assumes that the mortgage adjusted by 2%, upward or downward as the case may be, at its first adjustment date.)

Investopedia explains 'Periodic Interest Rate Cap'


The periodic interest rate cap on a loan along with the frequency of the interest rate adjustment dates determines how quickly the interest rate on the loan can move upward or downward. Loans which have initial interest rate caps frequently have initial and lifetime interest rate caps as well which limit the amount by which the interest rate on the loan can adjust at the first scheduled adjustment date and over the lifetime of the loan. A loan's interest rate cap structure should not be ignored as it can very important over the life of the loan.


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  2. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  4. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  5. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
  6. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by additional investment would not warrant the expense. A harvest strategy is employed when a line of business is considered to be a cash cow, meaning that the brand is mature and is unlikely to grow if more investment is added.
Trading Center