So I know the definition… “An interest rate cap is a package or portfolio of interest rate options that provide a positive payoff to the buyer if the reference rate exceeds the strike rate.”
Question is, does the bond issuer hold this option, and so when the interest rate increases over the strike, they cash this out to offset the losses having the pay higher interest rates?
Or is the bond holder the one that has this option?
Gotcha, so the issuer gets the cap which pays them compensation of rates go above the strike, but then the coupon goes up as well so the issuer would be indifferent if the rates went up past the strike rate because their position wouldn’t be improved?