invic

An issuer who wishes to issue a floating rate note with a collar would be equivalently issuing the note and:

A) buying a cap and selling a floor.

B) selling a cap and buying a floor.

C) buying a cap and a floor.

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Issuing a floating rate note with a collar (a cap and a floor) is equivalent to issuing the note, buying a cap to put an upper limit on the interest cost, and selling a floor which would put a minimum on interest expense and offset the cost of the cap to some extent.

invic

A floor on a floating rate note, from the bondholder’s perspective, is equivalent to:

A) owning a series of calls on fixed income securities.

B) owning a series of puts on fixed income securities.

C) writing a series of interest rate puts.

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A floor, which puts a minimum on floating rate interest payments is equivalent to owning calls on fixed income securities which will pay when interest rates fall. Owning interest rate puts, rather than writing them, would be equivalent to the floor. Puts on fixed income securities pay when interest rates increase.