Calculating Forward Rate Agreements

Question

On the 15th of May 2013 you enter a Forward  Rate Agreement (FRA)  to borrow on the 15th of September 2013 \$1’000’000 for 8 months at a fixed annualized interest rate of 5% (for a FRA  with a contract length of 8 months the compounding  frequency  is 1.5 times c.p.a.). Suppose the following bonds are traded in the market on the 15th of August 2013:

•    1-month zero coupon with \$1000 face value currently trades for \$996.672
•    3-month zero coupon bond with \$1000 face value currently trades for \$989.555
•    1-year 10% semi-annual coupon bond with \$1000 face value currently trades for \$1051.706
•    1-year 16% quarterly coupon bond with \$1000 face value currently trades for \$1110.628
•    1-year 4% quarterly coupon bond with \$1000 face value currently trades for \$993.938

x% semi-annual coupon means \$1000 x%/2 coupon payments every 6 months
x% quarterly coupon means \$1000 x%/4 coupon payments every 3 months
What is the value of the FRA for you as a borrower on the 15th of August 2013?

Summary

The question belongs to Finance and the question is about calculation of forward rate agreements. The question is about borrowing on forwards can help in the calculation of forward rate agreement with certain percentage of interest.

Total Word Count 27

• Rasha

this is a very good website

• maani

I have 50 questions for the same test your page is showing only 28

• joeanne

• joeanne

hi can anyone help or guide me to my assignments. thanks

• Monik

• Cristina

This solution is perfect ...thanks

• Janete

Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

• Sandeep

Perfect bank of solution.

• Oxana

great !

• Paul Brandon-Fritzius

thanks for the quick response. the solution looks good. :)

• tina Johnson

thnx for the answer. it was perfect. just the way i wanted it.

• Giuseppe

works fine.