Interest Rate Cap

An agreement where a party pays a premium up front or in installments to the counterparty. If the floating interest rate exceeds a stated fixed rate during the time of the cap agreement, the counterparty will pay the difference, based on the notional amount. The cap rate is also called the strike rate. An interest rate cap can protect the purchaser against rising interest rates.

Remarks: Bond funds including mutual funds (open-end and closed-end, actively managed and indexed), exchange-traded funds and unit investment trusts offer a convenient and affordable way to invest in a diversified portfolio of bonds, but a bond fund investment can differ from a bond investment in ways that are important to understand.