Hi, I posted this question on Chegg and the answers that the solver gave me for a and b had the same calculations, which made me wonder why prime rate +1% on b was not included in the solution?
Can you please tell me if both a and b have the right solutions?
Please, answer the below question with showing the entire steps very clearly An interest rate option (CAP) at a 6% with a premium of 0.3% is quoted in the market False a) As a buyer of this CAP you will pay a maximum of 6%. True Explain b) You have borrowed money based on prime rate 1% with a CAP of 6% listed above Calculate the maximum net interest cost you will pay and explain why a] False An interest rate cap is a derivative wherein the the buyer of the cap pays a maximum interest rate as defined by the cap rate. Maximum interest rate paid = gross rate – premium 6% – 0.3% 5.7% b] Maximum net interest cost = cap rate – premium = 6% – 0.3% = 5.7%