You borrowed money from a bank. Your stated floor rate is 4.5%. That's the lowest rate you can pay for having borrowed money to buy Betsy, your used army jeep with pink rims with 22,000 miles. But the ceiling rate you'll pay until you pay her off is 6.25%. Your rate floats as LIBOR plus 100 basis points, and with LIBOR at 3.5% today, you're just at your floor. If LIBOR goes lower, you'll still pay the 4.5% floor rate, even though with LIBOR at, say, 3.2%, you're 130 basis points over for your floor.
That's the interest rate collar on the low side. Then, on the high side, if LIBOR shoots to 6% and you'd owe, un-collared, 7% interest, you won't have to pay it, because your ceiling is 6.25%.
That's how collars work, and they're great for people who can afford interest charges within a range but not a cent more.
And we'll save our normal Fifty Shades joke on this one.
Related or Semi-related Video
Finance: What is Accrued Interest?42 Views
Finance allah shmoop What is a crude interest A crude
interest would be an investment holding in oil Black crude
texas t remember jed boy Howdy coming Listen to a
story about a man named about that Alright all good
but that's not what a crude interest is at all
while street never sleeps right So even though a given
bond might pay forty bucks twice a year what happens
if you buy the bond midway through a semester period
Like let's say this particular bond has a coupon paying
eight percent a year So on a thousand dollars a
principle this bond pays eighty bucks a year in the
form of interest or forty bucks twice a year paid
on june thirtieth in december thirty first Well think about
the number's here on a monthly basis each month that
bond creeps closer to its next interest payment and over
the course of a year there are twelve creeps Different
creeps each month that goes by the bonds creep further
into the eighty dollars a year or eighty dollars per
twelve months or eight twelves of a bond payment each
month Well at eighty bucks a year despond pay six
Dollars and sixty seven cents a month in interest Yeah
we got the math there Yeah So let's say you
sell it halfway into its period Presumably the market price
would reflect the accrued interest on the bond or three
months worth of interest or three times that six sixty
seven figure or yes twenty bucks And that makes sense
right You've held that bond a quarter a quarter of
a year a quarter of a year's interest of eighty
boxes one fourth of eighty or yep twenty So yeah
the math works What do you know So the price
of the bond would creep upward to reflect that accrued
interest That is if you sold it on the exact
end of the quarter that thousand dollar bond which was
conveniently selling it exactly part The end of the last
payment Well that bond would likely sell in the market
place for about a thousand twenty dollars The buyer would
get a check for forty bucks just ninety days later
from the a company that issued the bond And well
they can take that forty dollars and reinvested in crude
oil How about that Now you've made old jed very
proud So come and listen to a story about a
man named shmoop Poor rests A writer barely kept his
family fed and one day there was a site of 00:02:18.46 --> [endTime] web and well stuff happens
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