If a Firm Creates an Interest Rate Collar on a Variable

question 63

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:

Recession

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, typically visible in real GDP, income, employment, manufacturing, and retail sales.

Excess Reserves

The amount of reserves that a bank holds beyond the minimum required by regulation or central bank policy.

Decrease Deposits

A reduction in the amount of funds deposited in banks or financial institutions, often indicating a shift in savings or investment strategies.

Excess Reserves

The reserves that banks hold over and above the legal requirement set by the central bank, available to lend or invest.