Upfront rating costs

Caps and floors can be combined to create a third product, the interest rate collar. Let s return to the example of our corporate borrower, who is thinking about buying an interest rate cap, but is deterred by the upfront cost of 165 bp. If the company were to buy a cap and, at the same time, sell a floor, the premium received by the company from selling the floor will help to offset the cost of buying the cap. 

As an example, let s suppose the company bought a 5-year cap with a slightly higher strike rate of 3.50% at an up-front cost of 84 bp, and sold a 2.50% floor to bring in 30bp premium up-front. The premium income from the floor reduces the net cost by 35% to just 54 bp upfront, equivalent to 12 bp per annum if spread over five years. 

Long-life reactor core is also associated with an economic disadvantage related to a higher upfront premium or a higher interest rate on fuel cost. For a core with very long lifetime the corresponding effect in cost increase could be quite substantial. Other approaches to improve economic characteristics of small reactors should be used to compensate for this disadvantage. 

---