Interest Rate Collar

What Does Interest Rate Collar Mean?

An interest rate collar is an investment move that aims to protect the holder of an asset from that asset's decline in interest by assuring the holder that they can sell shares when the asset reaches a particular selling price. The investor pays for this protection.

Insuranceopedia Explains Interest Rate Collar

This plan gets its name because it is analogous to the physical device worn around the neck to protect that part of the body. Like a physical collar, the financial collar protects the well-being of an investor from a decrease in interest by giving them the option of selling their shares when those assets sell at a specific price, especially at a point that it might suddenly drop owing to fluctuations in the market.

While the collar gives a certain amount of protection, it does come with a disadvantage. Namely, if the price of the share goes up past the specified ceiling, it might have been already bought below that price.