In a Cap with Quarterly Reset Dates, the Cap Rate

question 18

Multiple Choice

In a cap with quarterly reset dates, the cap rate is 3.5% per annum and the notional principal is $1 million. Suppose that the LIBOR rate is 4.0% per annum for a particular 3-month period. What is the approximate payoff at the end of the 3 months?

• A) $10,000
• B) $5,000
• C) $2,500
• D) $1,250

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Definitions:

Effector

An organ or cell that acts in response to a stimulus, often leading to a physiological response in the body.

Reaction Time

The duration between the presentation of a stimulus and the initiation of the muscular response to that stimulus.

Knee-Jerk Response

A reflex action of the leg moving away from a stimulus, specifically a quick kick generated by tapping the tendon below the kneecap.

Quadriceps Tendon

A tendon that connects the quadriceps muscle to the patella (kneecap) allowing for knee extension.