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If a manager with a floating rate liability invests in a floating rate bond that has a cap, there will be a risk to the manager. The liability will reprice to 100 as the coupon payment reset to reflect the new market rates. However when the asset is capped and interest rates rises above the cap rate, the coupon will be fixed to the cap and it has a twin negative effect.

1. Coupon received will be lower than coupon paid
2. While liability reprices to 100 due to flexibility asset will be repriced downwards because the floating rate note has been effectively converted to a fixed rate note (at the cap rate) and experience a downward pricing because of duration.