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.

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Definitions:

Solvency Analysis

An evaluation of a company's ability to meet its long-term debts and financial obligations.

Dimensional Analysis

A mathematical technique used to convert one set of units to another, maintaining the same physical quantity.

Operating Activity

Activities that constitute the primary or core business functions of an entity, including production, distribution, and sales, affecting the operational cash flows.