Glossary of Municipal Securities Terms

INTEREST RATE CAP OR CEILING OR CAP

(1) Used typically on variable rate debt, the maximum interest rate that can be paid on the debt (often determined by state law), regardless of whether the method for determining the variable rate would otherwise provide for a higher rate of interest.

(2) An agreement for a derivative transaction entered into by the issuer or obligor of variable rate debt in which the counter-party agrees to pay any portion of the interest to be paid on the debt that exceeds a specified interest rate or strike price. A cap creates an upper limit on the interest rate cost to the issuer or obligor of variable rate debt without establishing a maximum interest rate payable to the holders of the debt. Compare: COLLAR; INTEREST RATE FLOOR.

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