Glossary of Municipal Securities Terms

INTEREST RATE FLOOR

(1) Used typically on variable rate debt, the minimum interest rate that can be paid on the debt, regardless of whether the method for determining the variable rate would otherwise provide for a lower rate of interest.

(2) Typically used as part of an interest rate collar for variable rate debt, an interest rate floor is an agreement whereby the issuer agrees to pay a stated rate of interest even if the actual rate on the variable rate debt is lower. The interest rate floor agreement is entered into with a third-party who typically pays the issuer an upfront fee in exchange for the right to collect the difference between the interest rate floor and the actual lower rate on the debt. See: COLLAR. Compare: INTEREST RATE CAP.

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