# Interest Rate Option (CAP) Assignment

An interest rate option (CAP) at a 6% with a premium of 0.3% is quoted in the market False

a) As a buyer of this CAP you will pay a maximum of 6%. True Explain

b) You have borrowed money based on prime rate 1% with a CAP of 6% listed above

Calculate the maximum net interest cost you will pay and explain why

a] False An interest rate cap is a derivative wherein the the buyer of the cap pays a maximum interest rate as defined by the cap rate. Maximum interest rate paid = gross rate – premium 6% – 0.3% 5.7%

b] Maximum net interest cost = cap rate – premium = 6% – 0.3% = 5.7%. Get Finance homework help today

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