Interest Rate Cap is a reference interest rate hedging agreement. It is addressed to businesses that have taken out loans and wish to be protected against a potential increase in the reference interest rate outside a predefined maximum level.
Features and benefits
- Protection against a potential future increase in the interest rate beyond a predefined level.
- Flexible transaction terms (term, amount, repayment plan, interest-bearing period).
- Hedging against potential risks from a rise in interest rates above the predefined cap, while preserving the potential benefits from a decrease in interest rates.
- Ability to choose among multiple term and cap combinations.
- Small additional loan cost in exchange for securing a maximum possible loan repayment cost.
- Option to pay premiums in a lump-sum or in instalments and to calculate a step-up level of protection.
- Availability of different caps and premiums.
Example
A business has taken out a 5-year loan of €5,000,000, with semi-annual payments and a reference rate of 6-month Euribor. The business has the option, against a premium, to ensure that whenever the reference rate goes above a cap, it will be compensated for the difference between the reference rate and the cap. This way, the business indirectly secures a maximum possible reference rate equal to the cap.
The business pays a premium of 0.35% (on the nominal amount) every 6 months on an accrual basis, in exchange for protection against an increase in the reference rate (6-month Euribor) above 1.50% (cap).
The information we provide about Eurobank products and services is general and non-binding.