Which of the Following Statements Is Correct

question 5

Multiple Choice

Which of the following statements is correct?

• A) The buyer of an interest rate cap earns an amount on each payment date that is equal to the cap rate (or the strike rate)on the contract times the notional.
• B) The buyer of an interest rate cap earns an amount on each payment date that is,at a minimum,the cap rate (or the strike rate)on the contract times the notional.
• C) The buyer of an interest rate cap earns profits when interest rates decline,so it is contract that is bearish on interest rates.
• D) If the buyer of an interest rate cap borrows using a floating rate bond that pays bbalibor,then its borrowing cost in any period is no larger than the cap rate (or the strike rate of the contract)times the notional.
• E) If the buyer of an interest rate cap purchases a floating rate bond that earns bbalibor,then it earns the cap rate (or the strike rate)times the notional each payment date.

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Definitions:

Cost Of Living

The average cost necessary to sustain a certain level of lifestyle in a given place, including expenses like housing, food, taxes, and healthcare.

Low Income

Refers to earning levels that are considerably lower than the national average, often resulting in financial constraints and limited access to resources.

Canadians

Citizens or residents of Canada, a country located in the northern part of North America.

Consumption

The act of using goods and services to satisfy personal or collective needs and desires, playing a central role in economic theories and the functioning of economies.