A 10-Year Interest Rate Cap Has a Cap Rate of 4

question 4

Short Answer

A 10-year interest rate cap has a cap rate of 4%, quarterly resets, and a notional principal of $1 million.
i) How many caplets are there underlying the cap? _ _ _ _ _ _
ii) Suppose the three-month interest rate at time 2.5 years is 5.2% per annum. What is the payoff on the interest rate cap resulting from this?
_ _ _ _ __
iii) At what time measured in years from today) would the payoff in ii) be made?
_ _ _ _ _ _

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Definitions:

Positive Ions

Entities such as atoms or molecules that possess a net positive charge due to the loss of one or more electrons.

Action Potential

Action Potential is a rapid and momentary electrical charge that travels along a neuron, triggering the release of neurotransmitters and the transmission of signals.

Neurotransmitters

Chemical messengers that transmit signals across the synaptic gap from one neuron to another in the nervous system.

Synaptic Gap

The tiny space between neurons where neurotransmitters are released to transmit information.