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the purchase of an interest rate cap by a borrower with a floating rate loan does...

the purchase of an interest rate cap by a borrower with a floating rate loan does which of the following? A: transfers all interest rate risk to the bank B transfers all interest rate risk away from the borrower to the bank C tranfers some interest rate risk away from the borrower to the cap counterparty D transfers no interest rate risk to the bank because of the cap counterparty's position

the largerst asset category for typical deposit-taking commercial banks is __ A: investment-grade debt securities B. Time deposites C Loans D both A and B

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Answer #1

An interest rate cap is a financial interest rate derivative which ensures its buyer a certain amount of compensation everytime the interest rate (and hence the interest expense payable by the borrower) exceeds a pre-specified cap rate. An example would be a borrower who pays a floating rate LIBOR loan and has an interest rate cap at 3 %. Every time the LIBOR rate fluctuates by more than 3 % the interest rate cap purchaser is compensated. However, if the fluctuation is within the pre-specified cap rate, no compensation is received.

Therefore, the correct option is (c).

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