An interest rate floor whose existence or activation depends on a floating rate or index falling below a certain barrier or threshold level. Generally, trigger floors come in different types: knock-in floor, knock-out floor, one-time trigger floor, and sticky trigger floor. The trigger rate can be higher or lower than the floor rate, depending on an investor’s views on interest rate. Insofar as the existence of trigger floors is just a matter of probability, not surety, premiums on trigger floors usually exceed premiums on ordinary floors.

For example, an investor wants to hedge against interest rates dropping below above 5%. He buys a two-year knock-out, sticky trigger floor on a floating reference index at 5%. The trigger will be set, for example, at 7%. In this case, we assume the investor contemplates that if rates could touch the trigger in the two year horizon, then it would be relatively unlikely that rates rebound to 5%. Of course, once the floor is knocked-out, the investor need reconsider his outlook, readjusting whereby his hedging strategy.

The trigger floor is also called a barrier floor.