Question

Use the following information to answer Questions 8 to 10. A company intends issuing 90-day bank bills with a face value of $1 million in two months’ time. The treasurer enters into a 2X5FRA on a face value of $1 million at a contract rate of 5.5% to hedge the interest rate risk. The bank bills are issued in two months’ time on day the FRA is settled when the 90-day bank bill rate is 6.5%.

8. The settlement amount received by the company on the 2X5FRA settled at a market rate of 6.5% is: (a) $2,394.38 (b) $10,985.81 (c) $13,380.19 (d) $15,774.57.

9. The effective interest payment on the borrowing (i.e. the discount on the bills issued plus/minus the settlement amount of the FRA) is: (a) $10,985.81 (b) $13,380.19 (c) $15,774.57 (d) $18,168.95.

10. The effective interest rate on the company’s borrowing is: (a) 7.50% (b) 6.50% (c) 5.50% (d) 4.50%.

Answer 1

Ans 8. Option A

Ans 9. Option B

Ans10. Option C

As shown below: