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What does interest rate collar mean?

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interest rate collar
Noun

An arrangement based on a principal notional amount in which one party is both the writer of an interest rate cap and buyer of an interest rate floor, where, on the reset date for both options, the cap writer pays the cap buyer any interest differential if the reference rate is above the cap rate and the floor writer pays the floor buyer if the reference rate is below the floor rate.

Synonym(s): 
  • collar; corridor.
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