- interest rate cap in a commercial loan negotiated at loan origination. The lender agrees to fix the maximum interest rate charged on a floating rate loan, for which the borrower pays a fee. By paying a cap fee the borrower obtains the lender's guarantee that a loan made at 10% will not exceed an annual rate of 15% over the life of the loan.
- clause in a residential mortgage loan agreement limiting any interest rate or payment increases to a specified amount until the loan is fully paid. An annual cap limits yearly increases; a life of loan cap remains in force throughout the term of the loan; a payment cap limits month-to-month increases in loan payments.
- upper end of a collar, a two-way credit agreement protecting both borrower and lender against fluctuating interest rates; the lower end is a floor.
- in a wire transfer payment system, the originating bank's net debit cap, placing a limit on its aggregate daylight overdraft exposure in its reserve account it is willing to accept during a single business day.
Bonds: highest level interest rate that can be paid on a floating-rate debt instrument. For example, a variable-rate note might have a cap of 8%, meaning that the yield cannot exceed 8% even if the general level of interest rates goes much higher than 8%.
Mortgages: highest interest rate level that an adjustable-rate mortgage (ARM) can rise to over a particular period of time. For example, an ARM contract may specify that the rate cannot jump more than two points in any year, or a total of six points during the life of the mortgage.
Stocks: short for capitalization, or the total current value of a company's outstanding shares in dollars. A stock's capitalization is determined by multiplying the total number of shares outstanding by the stock's price. Analysts also refer to small-, medium-, and large-cap stocks as a way of distinguishing the capitalizations of companies they are interested in. Many mutual funds restrict themselves to the small-, medium-, or large-cap universes. See also collar.
abbreviation for capital letter.
in adjustable rate mortgages, a limit placed on adjustments to protect the borrower from large increases in the interest rate or the payment level.
