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
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- 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.
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| Common Uses |
- Provides protection from rising rates; typically at a lower cost than the Capped Floater advance.
- Effective in managing balance-sheet interest-rate
sensitivity within a certain interest-rate band.
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| Maturities |
- Available in terms of one to 10 years.
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| 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.
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| Interest Calculation |
- Interest due on rate-adjustment dates.
- Interest is calculated on an actual/360-day basis.
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| Minimum |
- $10 million minimum but smaller requests may be
accommodated in special offerings.
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| Disbursement
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- 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.
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| Prepayment |
- The floating-rate funding is prepayable, in whole or in part, on any rate-reset date without 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.
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| 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 for a discussion
of the risks and other considerations associated
with the Collar advance.
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| More Information |
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