An interest rate floor is a contract associated with financial products and loans that feature floating rates. This acts as protection for the buyer by ensuring that the interest rate for a product or loan does not drop below a specified rate.
The counterpart of the interest rate floor is the interest rate ceiling. The former pays out when the interest rate falls below the specified rate in the contract. The latter pays out when it hits a rate above the one specified in the contract. Both contracts are designed to protect the buyer from the erratic shifts of the market.
These contracts are purchased at market exchange spots.
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