Why would any company purchase a floor

Why would any company purchase a floor, since it keeps its interest payments up when interest rates fall?

While borrowers do not purchase floors by themselves for this reason, they do purchase them along with caps to create collars. Since the insurer benefits from a floor, it is willing to sell a collar for a lower premium than just a cap alone. The borrower gets the protection of the cap at a lower price than by simply purchasing the cap alone.

Be the first to comment on "Why would any company purchase a floor"

Leave a comment

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.