The yield curve is flat at 6% per annum.What is the value of an FRA where the holder receives interest at the rate of 8% per annum for a six-month period on a principal of $1,000 starting in two years? All rates are compounded semiannually.
A) $9.12
B) $9.02
C) $8.88
D) $8.63

Question

Quizplus · Accepted Answer

The value of the FRA is the value of receiving an extra 0.5×(0.08−0.06)×1000 = $10 in 2.5 years.This is 10/(1.03⁵)= $8.63.

The Yield Curve Is Flat at 6% Per Annum