Knowledge

Barrier Floor

A modified interest rate floor that only pays a return to the buyer when the underlying index, usually LIBOR, is below the defined barrier level. When below this level the barrier floor payout is the same as the payout on a traditional interest rate floor. The barrier feature is usually applied to each LIBOR period separately. A traditional Interest rate floor can be considered as a barrier floor where the floor strike and floor barrier are set at the same level. A barrier Floor with a maximum dollar payout is known as a interest rate floor.