Question

A Forward Rate Agreement contains an agreed interest rate of 2.7% 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%?

Answer 1

FRA rate or fixed rate =       2.70%
On borrowing date 6-month interest rate = 2.90%
Time of loan months =       6
Notional amount of loan= $500000

net Amount settlement to borrower =

(prevailing interest rate-FRA rate) *Notional amount*month/12      
=(2.9%-2.7%)*500000*6/12      
=$500      

Amount is positive. So borrower will receive $500      

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