What is a Ceiling
A ceiling is a maximum permissible level in a financial transaction. A ceiling can refer to the highest price, the maximum interest rate, or the largest of some other factor involved in a transaction.
BREAKING DOWN Ceiling
Ceilings are used broadly across the financial industry. Financial institutions set ceilings for fund transfer transactions. Goods and services may have mandated price ceilings. Financial analysts also typically set a price ceiling or price ceiling estimate when valuing transactions.
Financial Transaction Ceilings
There are numerous scenarios across the economic market where a ceiling may be instituted. Financial institutions often set price ceilings to mitigate funding transaction risks. These ceilings will typically limit an amount of money a customer can transfer per day, week or month. Financial institutions may also set a limit on the number of transactions allowed in an account.
In commerce, ceilings can be used as a regulated price instituted by the government. Price ceilings may also be integrated because of competitive factors. Price ceilings will limit the value a company can sell a good or service for and provide an advantage to buyers.
In detailed net present value calculations reporting on the potential value of investments, financial analysts will also typically set a ceiling. Common practices for valuation techniques include setting a floor and a ceiling which provides a valuation range for negotiation in financial transaction deals.
Credit Market Products
Many variable rate credit products will often use interest rate ceilings in their loan provisions. Generally, interest rate ceilings can be instituted with any type of variable rate product allowing rates to increase only to a specified level.
Loans and bonds can include an interest rate ceiling. In both cases the maximum interest rate ceiling would protect the borrower from rising rates of interest.
Many credit product contracts will include both a floor and a ceiling. A floor works to protect the lender from decreasing market rates. Thus, allowing the lender to ensure they will receive a specified level of income regardless of the market’s current rate.
In the credit market ceiling limits on borrowing can also be used to mitigate broad ranging credit risks. States and federal governments may have debt ceilings that are implemented based on credit quality requirements. In certain situations, borrowers may also have debt ceiling limits on the amount of money they can borrower. Reverse mortgages for example have regulated ceilings on the lifetime principal allowances for borrowers 62 or older.