Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

MEANING OF INTEREST RATE REVERSE COLLAR

An interest rate reverse collar is an instrument that gives the buyer protection against falling rates. Hence, the reverse interest rate collar represents buying an interest rate floor and simultaneously selling an interest rate cap.

• The objective is to protect the buyer from falling interest rates.
• The buyer selects the index rate and matches the maturity and notional principal amounts for the floor and cap.
• Buyers can construct zero-cost reverse collars when it is possible to find floor and cap rates with the same premiums that provide an acceptable band.