A floating-rate note (floater) which entails the payment of a coupon only up to a preset maximum level of the reference rate. This structure includes a cap embedded in a vanilla note where the holder effectively sells the issuer a cap. In this sense, a capped floater protects the issuer from unbridled increases in the interest rate levels.
Differently stated, a capped floater combines a floating rate advance and a long position in an interest rate cap. The structure is ideal for institutions looking to rein in rising rates by effectively putting a cap on the interest expense related to a specific portion of their funding book.
