If your company is currently issuing BAs, you can buy an Interest Rate Collar to limit your interest expense within a known range. An Interest Rate Collar is an interest rate "cap" agreement (specifying a maximum strike rate) that you buy in whole or in part through the sale of an interest rate "floor" agreement (specifying a minimum strike rate).
The up-front cost (premium) of the collar is the difference between the premium necessary to purchase the cap and the premium you receive from the sale of the floor.
With a collar, the borrower is protected from rates rising above the cap rate while giving up the benefit from rates falling below the floor rate.
Zero Cost Collars are the most popular form of collar, as there is no up-front premium. Your company chooses a desired cap rate and TD will calculate the corresponding floor rate so that the proceeds from the sale of the floor will exactly offset the price of the cap.
Benefits to your company:
- Interest rate protection of a cap with potentially lower up-front costs.
- Flexible risk management and customization. You can specify the range (between the cap and the floor) to suit your company's risk tolerance and interest rate expectations.
- Collars may be canceled or unwound at prevailing market rates. Similarly to unwinding a swap, you may realize a gain or a loss depending on market conditions.
For more information contact a Relationship Manager
at the Commercial Banking Centre nearest you!
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