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In part (c) of this question, where they have calculated the amount the company will have to pay to the bank under the FRA, why have they used 1/(1+(3.5%*4/12))? Why is that part required?
Would greatly appreciate if you could clarify. Thank you
I doubt that part would be required by the current examiner (this question was set by a previous examiner).
However, the reason for it is that the interest on the $7.1M will be received at the rate of 3.5% at the end of the 4 month deposit. However the ‘settling up’ by having to pay the bank the difference of 0.05% takes place at the start of the 4 months. So the actual payment is a little bit lower than it would have been had it been allowed to pay at the end of the 4 months – the part you have typed is to discount it for those 4 months.
Thank you very much! That explanation was very clear.
Also typing my reply to https://opentuition.com/topic/exam-tips-28/ here because I couldn’t reply in the original post.
Thank you so much for your reply John. All of those tips were very useful and helped me feel calmer before the exam. I really appreciate that you took the time to give that elaborate reply. I read your reply before the exam but couldn’t thank you.
I sat for the exam and while it was difficult, I’m hoping that I did enough to pass.
Your help has been very useful in my exam preparation since this was the only platform I had to clarify all the doubts I had. I received clear, detailed and prompt replies to all the questions I asked from you and I’m grateful. I’m planning to donate to Open Tuition in the future.
Thanks again for your help. Keep up the amazing work that you do and stay safe.
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