Capped Floater

A capped floater is a floating-rate bond with a cap provision that prevents the coupon rate from increasing above a specified maximum rate. As a consequence, the cap provision protects the issuer against rising interest rates and is thus an issuer option.

Because the investor is long the bond but short the embedded option, the value of the cap decreases the value of the capped floater relative to the value of the straight bond:

Value of Capped Floater = Value of Straight Bond – Value of Embedded Cap