Cap Coupon Rate Example
- Nancy Cohn (Deactivated)
In this example, a Cap Security has:
Strike Rate of 8%
Underlying Index on the cap contract is LIBOR
Index Offset is 250 basis points
The security Resets and Pays coupons on January 1, April 1, July 1, and October 1.
Rates are as follows.
Rate Reset Date | Coupon Rate | Index Offset | Total Rate |
|---|---|---|---|
1-Jan | 6.0 | 2.5 | 8.5 |
1-Apr | 5.0 | 2.5 | 7.5 |
1-Jul | 5.5 | 2.5 | 8.0 |
1-Oct | 4.5 | 2.5 | 7.0 |
On January 1, Eagle Accounting compares the All in Rate (Total Rate), which is 8.5%, against the Strike Price of 8%. Because the security is a Cap contract and the All in Rate is greater than the Strike Price, Eagle Accounting accrues the difference between the All in Rate and the Strike Rate. In this example, Eagle Accounting accrues at a rate of .5% (8.5% - 8.0%).
In the following quarters, the rates are not greater than the Strike Rate, so Eagle Accounting accrues at a Coupon Rate of 0.00%.