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4. What are the risks of buying a floor?

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The worst that can happen is the buyer pays the premium for the floor but does not receive any payments from it, for example if the floating interest rate stays above the floor rate for the life of the instrument.

Provided that the floor premium has been paid, there can never be a penalty to exit a floor early.  The floor’s early redemption value will always be positive or zero.  The early redemption value of a floor tends to decline as time passes.

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