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Hi John,
Libor 4%,yield on commercial paper – Libor +0.6%.
FRA fixed deposit rate is 3.45% 5v9 If Libor fell by 0.5%Answer
Expected receipt: 7.1mx4.1%x4/12=97033
Fra : 7.1m(3.5%-3.45%)x4/12×1/1+(3.5×4/12)=1169.65
So the effective rate is 4.05% =3.45%+.6%I do not understand the FRA calculation, in your lecture it should be (3.5%+0.6%)-3.45%x4/12 which get Effective rate of 3.45% equal to FRA ?
Thanks
JamieIn future, you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other 🙂
The answer you have copied assumes that the FRA is given against LIBOR, which means that LIBOR is effectively being fixed at 3.45%, but then they will actually receive 0.6% above the fixed LIBOR which gives 3.45% + 0.6% = 4.05%.
This is not normally the case unless this is how the bank quoted it. Normally the quote given by the bank will be for the actual interest rate and therefore it would be fixed at the 3.45%. It depends on the exact wording of the agreement in the question.
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