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   Knock-In Premium Cap
   















 

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Knock-In Premium Cap

A cap on a floating rate with the cap strike substantially above current rates and a trigger rate that must be breached before any premium payments are required. The trigger rate usually lies somewhere between the current rate and the cap strike. The holder of the cap pays a premium on reset dates only when the reference index rate is above the trigger rate. The premium (for each period) will rise as the trigger rate is closer to the cap strike. This structure is used to reduce cap premiums when a floating rate payer believes rates will not rise significantly and the chance of needing cap protection is small. It is important to emphasize that it is the cap premium, not the cap protection which is subject to being knocked in. The fact that a premium is not always paid means that the premium will be larger than a standard cap premium when it is paid. See also Knock-Out Premium Cap.

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