A cap structure that limits interest payment increase to a specific amount (called a jump) at each date the underlying rate resets. This structure is usually embedded in floating rate notes, placing an upper limit on floating interest payments. For example, consider a note combined with a step-up cap that pays initially 4%. If the allowed increase or jump is 20 basis points, then the next period’s rate will be set at the rate applied to the previous period plus the jump (0.2%), and so on.
The step-up cap is also called a periodic cap.
Comments