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Credit Products – Collar Advance

The Collar advance limits a floating interest rate to a predetermined range. The collar features a combination of an embedded interest-rate cap purchased, or "long," and an embedded interest-rate floor sold, or "short." The interest-rate cap sets the maximum rate the member will pay on the advance. The interest-rate floor offsets a portion of the cost of the cap, but it sets a minimum rate on the advance. It can be a cost-effective solution for the member seeking protection against higher interest rates.


 Key Features
  • Floating rate, nonamortizing

  • The cost of the term funding and the premium for the embedded collar feature is included in the advance rate.

  • Members specify the term, index, and cap and floor strike rates based on their own interest-rate risk management objectives.
Common Uses
  • Cost effective alternative to a Capped Floater advance to limit exposure to rising interest rates while giving up some of the benefit of falling interest rates.

  • Fund LIBOR-indexed assets.
Maturities
  • Out to 20 years.
Indices
  • Adjusts to either one-month or three-month London Interbank Offered Rate (LIBOR).

  • Resets on the anniversary of its disbursement (monthly or quarterly, equal to the term of the LIBOR), if it is a Boston business day.
Interest Calculation
  • Interest due on rate-adjustment dates.

  • Interest is calculated on an actual/360-day basis.
Minimum
  • $2 million minimum but smaller requests may be accommodated in special offerings.
Disbursement
  • Typically disburses in two business days. Collar advances can be requested until 1:00 p.m. on a Boston and London business day for a second-day (spot) disbursement.
Prepayment
  • The floating-rate funding is prepayable, in whole or in part, with fee with two business-days notice. However, a member may be charged a fee to make the Bank financially indifferent to the member’s decision to unwind the embedded Collar feature.
Risks
  • The Federal Home Loan Bank of Boston does not act as a financial adviser, and members should independently evaluate the suitability and risks of these advances. Please see the Collar Advance Primer Adobe PDF icon for a discussion of the risks and other considerations associated with the Collar advance.
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