Some time ago a company entered into an FRA where it agreed to receive 5.9% LIBOR on a principal of $10 million. The forward LIBOR rate for the period 1 year and 1.5 years is 5.1%. The six-month risk-free rate is 2.5%. What is the value of the FRA?

Some time ago a company entered into an FRA where it agreed to receive 5.9% LIBOR on a principal of $10 million. The forward LIBOR rate for the period 1 year and 1.5 years is 5.1%. The six-month risk-free rate is 2.5%. What is the value of the FRA?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 9P

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Amortized Loans

The term "amortization" refers to spreading the value of a loan or a debt over a series of regular payments or installments comprising of both the principal and interest amount. It generally involves the process where in the value of a loan or an intangible asset is written down over its maturity period.

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