If a Firm Creates an Interest Rate Collar on a Variable

question 11

Multiple Choice

If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always:

• A) Remain constant at the average of the floor and cap rates.
• B) Remain constant at the floor rate.
• C) Remain constant at the cap rate.
• D) Be higher than, or equal to, the cap but lower than, or equal to, the floor.
• E) Be higher than, or equal to, the floor but lower than, or equal to, the cap.

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Definitions:

Collection Time

The average period it takes for a business to receive payments owed by its customers, reflecting the effectiveness of its credit and collection policies.

Average Daily Receipts

The average amount of money received by a business per day over a specific period, often used in financial analysis.

Collection Delay

The time lag between when a payment is made by a customer and when the funds are available to the recipient.

Lockbox System

A service offered by banks to companies for the receipt of payment from customers, involving the collection of payments directly at a postal box and swiftly depositing them into the company's bank account.