On January 1, 2020, Teller Corporation borrows $1 million for three years at the prime rate plus 1.5%, with the rate adjusted annually. The interest is due December 31 of each year. The prime rate is currently 0.5%. To hedge against rising interest rates, Teller buys a three-year, 2% interest rate cap for $5,000, paid in full immediately. Teller's loan was renewed December 31, 2020, when the prime rate was 0.7%, and the fair value of the cap declines by $800. By the end of 2021, the cap's value increases by $300. The cap qualifies as a hedge of the future variable interest payment, and all income effects of the loan and the cap are reported in interest expense.
 
What is the change in the time value of the cap in 2020? 

Select one: 

A. $1,200 increase 

B. $   800 decrease 

C. $2,000 increase 

D. $1,200 decrease 

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Loan borrowed for 1st year 1st jan 31st Dec 2020 Money borrowed 1m at an ... View the full answer