Which of the Following Statements About an Interest Rate Cap

question 13

Multiple Choice

Which of the following statements about an interest rate cap is correct?

• A) For a company that has borrowed using a floating-rate loan,a long position in an interest rate cap prevents interest costs from going above a fixed level.
• B) For a company that has purchased a floating-rate loan,a long position in an interest rate cap provides protection against the interest cost going above some fixed level.
• C) An interest rate cap guarantees a forward rate that is binding at a future date.
• D) An interest rate cap guarantees payments if spot prices move outside an interval,with caps at the top and bottom.
• E) None of these answers are correct.

---

Definitions:

Uncollectible Accounts

Refers to receivables that are deemed unlikely to be collected, indicating potential losses for a company.

Allowance for Doubtful Accounts

An accounting provision made by a company to account for accounts receivable that might not be collected.

Bad Debts Expense

Financial accounting charge for accounts receivable that a company does not expect to collect.

Allowance Method

The Allowance Method is an accounting technique that estimates and accounts for potential uncollected receivables or bad debt expenses.