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If there is a notional amount of $1000 to depsoit and we have agreed with bank a rate of 3.45% and LIBOR rate comes to 3.5% , what amount will we pay to the bank?
Firstly, it is not LIBOR that is relevant.
What is relevant is the actual interest rate that is being quoted by the bank for fixed interest deposits on the date that we deposit the money.
If we have an FRA at 3.45%, and if the interest rate being quoted on the date the deposit starts is 3.5%, then the bank will pay us 3.5% (normally at the end of the deposit) and we will pay the bank 0.05% (usually at the start of the deposit).(I say usually about when the transfers are made, because that really depends on the agreement that we have with the bank)
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