Module 1 · Chapter 3

The Cap, and the Family

A cap is bought for one premium, and after that only the bank can owe anything. What the cap pays, what it costs, and why the board paired it with a swap.

≈ 11 min read 8-question test

In this chapter

  • What the cap pays each quarter, and what it costs
  • Why the board swapped most of the loan and capped the rest
  • Why credit under the cap runs one way only

3.1The cap in one paragraph

A cap is an option on an interest rate. The buyer pays a premium once. In return, the seller pays the buyer whenever the rate fixes above an agreed level, called the Cap Rate. Atlas is the buyer and Pellhaven Bank plc is the seller.

Pellhaven's rates desk offered the cap beside the swap, as page two of the same proposal. The swap costs nothing to enter, but the cap costs cash on the first day. The swap is an exchange of promises, and the cap is a purchase.

Key point

After the premium, Atlas owes nothing under the cap, ever. Only Pellhaven can owe anything, and only in a quarter when the rate fixes above the Cap Rate.

Also in this chapter

  1. The five terms of the cap
  2. What the cap pays each quarter
  3. Why the board swapped most and capped the rest
  4. Why credit under the cap runs one way
  5. Where the cap sits in the family
  6. Why the cap is not insurance
  7. Your job

Preview

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