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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