Interest Rate Floor

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Interest Rate Floor

A floor interest rate is an instrument that protects the floor buyer (the lender) from losses resulting from a decrease in interest rates. For example, an adjustable-rate mortgage may have an interest rate floor stating that the rate will not go below 4.00% even if the formula used to calculate the interest rate would have it do so.

There is a flip-side to an interest rate floor. It’s called the interest rate ceiling.

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