An interest rate cap which provides, at specific adjustment dates, protection against increasing interest rates for loans and mortgages. It limits the maximum amount of adjustable rate loans on a periodic basis. The caplet rate resets at a pre-agreed spread to the reference rate for each period through the cap’s life. For that reason, the holder of a periodic cap doesn’t receive the absolute protection otherwise provided by normal caps.
For example, consider an adjustable rate loan with a reference rate of 5%, an initial cap of 1.5% and a periodic cap of 1.5%. At the first adjustment date, this loan can adjust upward to 9% at most. However, at the second adjustment date, it can adjust 1.5% at least.
The periodic cap is also known as a step-up cap.
