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4. What are the risks of a cap?

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

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

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