19831985

janakisri Wrote:
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> and if rates fall below the floor ( say 2% ) ,
> what happens ?
>
> Floor is in the money , so you pay Floor-Libor to
> the collar seller ( you are short a floor )
>
> You also pay LIBOR on the floating rate bond .
>
> So I don't get it .

I think you would sell the floor at the same rate. Using my example of above, if LIBOR goes to 2%, you pay 2% on the bond, pay 5% on the floor and cap expires worthless.

Total interest cost = 7%

NO EXCUSES