Interest Rate Floor

An interest rate floor is a financial agreement that ensures the interest rate on a variable-rate loan or investment does not fall below a specified minimum level. For example, if the floor is set at 2%, even if market rates drop to 1%, the borrower or investor will still receive or pay 2%. This provides protection against falling interest rates, guaranteeing a minimum return or cost. Floors are often used in interest rate derivatives or adjustable-rate loans to manage the risk of declining rates, offering financial stability within uncertain market conditions.