Cap

Definition:

An upper limit on the interest rate on a floating-rate note (FRN) or an adjustable-rate mortgage (ARM). Also, an OTC derivatives contract consisting of a series of European interest rate call options; used to protect an issuer of floating-rate debt from interest rate increases. Each individual call option within the cap is called a caplet. Opposite of a floor.

Investing Essentials


Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

Term of the Day

Plain vanilla

A term that refers to a relatively simple derivative financial instrument, usually a swap or other derivative that is issued with standard features.

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