Ceiling
What Is a Ceiling?
In finance, a ceiling is the maximum permitted level in a financial transaction. The term can be applied to different factors, for example, interest rates, loan balances, amortization periods, and purchase prices.
Ceilings are in many cases used to control risks, by forcing an upper limit to the size or cost that is feasible for a given transaction.
How Ceilings Work
There are numerous sorts of ceilings utilized across the modern financial markets. A common model is rent control, which forces an upper limit, or "ceiling", on the rent that [landlords](/property manager) can charge to their tenants. Other common models incorporate the upper limits forced by banks on the size or frequency of [electronic fund transfers](/electronic-funds-move act); the maximum interest rates permitted under law for consumer loans; or the highest passable price for a regulated utility.
Ceilings are additionally commonly utilized in the research reports and projections of financial analysts. For example, financial models seeking to estimate the present value and future growth possibilities of a company will frequently contain value ranges with a ceiling that determines the upper limit of the company's estimated value. Likewise, they are frequently included as an 'hopeful' or 'most ideal situation' in analysts' projections seeing intently followed metrics, for example, stock prices and estimated earnings per share (EPS).
Credit products with variable interest rates will frequently likewise remember interest rate ceilings for their loan provisions. Under these provisions, interest rates are permitted to rise over the lifetime of the loan, yet entirely up to a predetermined maximum level. Likewise, these agreements may likewise contain a base interest level, or "floor," which acts to safeguard the lender against an uncontrolled decline to their greatest advantage income.
One more consequential illustration of a ceiling in finance is the United States debt ceiling, which is the legitimately commanded limit to the total size of the national debt. Congress has needed to raise the debt ceiling on several events in recent many years, to keep the nation from possibly defaulting or becoming [delinquent](/specialized default) on its sovereign debt obligations.
Real World Example of a Ceiling
Comparable however less high-profile models can be found in the commercial credit market, where credit limits on borrowing can likewise be utilized to alleviate broad going credit risks. States and federal legislatures, for instance, may have debt ceilings that are executed in view of credit quality requirements.
In certain circumstances, individual borrowers may likewise face ceilings on the amount of money they can borrow. One such model is reverse mortgages, which have regulated ceilings on the lifetime principal allowances for borrowers aged 62 or more seasoned.
Features
- They are commonly applied to factors, for example, interest rates, amortization periods, or the principal balance of loans.
- Ceilings are utilized to control risks. According to the viewpoint of lenders, for example, they can be utilized to control the risk of default by debtors.
- Ceilings are upper limits which can be applied to different parts of a financial transaction.
