A Forward Rate Agreement contains an agreed interest rate of 3.1% on a 6-month loan.If settled at the time of borrowing,what amount would the borrower pay or receive on a $500,000 loan if the prevailing 6-month interest rate is 2.9%?
A) $1,000 payment
B) $1,000 receipt
C) $972 payment
D) $972 receipt

Question

Quizplus · Accepted Answer

To calculate the settlement amount on a Forward Rate Agreement, we need to find the difference between the agreed interest rate and the prevailing interest rate, and then multiply it by the loan principal and the number of days in the loan period.

In this case, the loan principal is $500,000, the number of days in the loan period is 182 (assuming a 6-month period of 182.5 days), and the difference between the agreed interest rate of 3.1% and the prevailing interest rate of 2.9% is 0.2%.

So, the settlement amount would be:
($500,000 x 0.2% x 182)/365 = $972 (rounded to the nearest dollar)

Since the prevailing interest rate is lower than the agreed interest rate, the borrower would need to make a payment of $972 to compensate the lender for the difference in interest rates. Thus, the correct answer is C.

A Forward Rate Agreement Contains an Agreed Interest Rate of 3.1