USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows:

-Refer to Exhibit 15.7. What is the implied 90-day forward rate at the beginning of the second quarter?
A) 2.70%
B) 2.85%
C) 2.98%
D) 3.15%
E) 3.32%

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows:
 
-Refer to Exhibit 15.7. What is the implied 90-day forward rate at the beginning of the second quarter?
A) 2.70% 
B) 2.85% 
C) 2.98% 
D) 3.15% 
E) 3.32%

Quizplus · Accepted Answer

To find the implied 90-day forward rate at the beginning of the second quarter, we look at the difference between the 90-day rate at the beginning of the third quarter (3.20%) and the 90-day rate at the beginning of the second quarter (2.76%). This difference is 0.44%. We then add this difference to the 90-day rate at the beginning of the third quarter to get the implied 90-day forward rate at the beginning of the second quarter. So, the implied 90-day forward rate at the beginning of the second quarter is 3.20% + 0.44% = 2.98%. Therefore, the correct answer is choice C.