The Writer of an Interest Rate Floor Contract

question 17

Multiple Choice

The writer of an interest rate floor contract:

• A) has the obligation to buy the underlying bond at a fixed price
• B) has the obligation to sell the underlying bond at a fixed price
• C) has the obligation to pay (the strike rate minus the spot rate)times the notional
• D) has the obligation to pay (the spot rate minus the strike rate)times the notional in case it's a positive number
• E) has the obligation to pay (the strike rate minus the spot rate)times the notional in case it's a positive number

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Definitions:

Time Value

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Net Present Value

A method used in capital budgeting to assess the profitability of an investment or project by calculating the present value of its expected cash flows minus the initial investment cost.

Capital Budgeting

The process of making capital expenditure decisions in business.

Internal Reports

Financial or operational reports generated for internal use by the management and not for external stakeholders.