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cap


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1 A ceiling on a price; for example, an interest-rate cap would set a maximum interest rate to be charged on a loan, regardless of prevailing general interest-rate levels. A lender would charge a fee for including a cap at the outset to offset this risk. Caps may also limit annual increases to a certain level. Compare floor. See also collar.

2 A feature of an option that sets a maximum cost, payout, or return.

Subjects: Financial Institutions and Services.


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