TeachMeFinance.com - explain cap
a limit, such as that placed on an adjustable rate mortgage, on
how much a monthly payment or interest rate can increase or decrease.
cap -- (1) the maximum allowable interest rate increase for adjustable rate mortgages. Caps embedded in mortgage agreements may limit the amount of upward change in the rate of interest at each adjustment period and provide a fixed maximum over which the rate cannot rise during the life of the loan. (2) an agreement negotiated between a buyer and seller. The buyer of a cap agreement pays a fee to the seller. In return, the seller will pay the buyer if a designated floating index rate is higher than a specified fixed rate on designated days. The seller pays nothing If the floating rate is below the fixed rate. Buyers of cap agreements use them to hedge against rising interest rates , because payments to the buyer increase as rates rise. See floor. See collar.
About the author
Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.