Cap Coupon Rate Example

Owned by Nancy Cohn (Deactivated)
Last updated: Aug 23, 2023
1 min read

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

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%.