FIN 4604 Final Questions And Correct
Answers
Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending
margin of 1.26 percent per annum on a six-month rollover basis from a London bank. If six-
month LIBOR is 4.55 percent over the first six-month interval and 5.380 percent over the second
six-month interval, how much will Grecian Tile pay in interest over the first year of its
Eurodollar loan? $93,375.00
$*(libor+margin)/2+$(2nd libor+margin)/2
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.62 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 4.935 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. Buyer pays the
seller $5,187.57
Since the settlement rate is less than the agreement rate, the buyer pays the seller the absolute
value of the FRA
, FIN 4604 Final Questions And Correct
Answers
$*[(settlement-agreement)*days/360]/[1+(settlement*days/360)]
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.52 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 6.135 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. Seller pays the
buyer $4,643.20
Since the settlement rate is greater than the agreement rate, the seller pays the buyer the absolute
value of the FRA.
$*[(settlement-agreement)*days/360]/[1+(settlement*days/360)]
A "three against nine" FRA has an agreement rate of 4.91 percent. You believe six-month LIBOR
in three months will be 5.205 percent. You decide to take a speculative position in a FRA with a
$1,000,000 notional value. There are 183 days in the FRA period. Determine whether you should
buy or sell the FRA and what your expected profit will be if your forecast is correct about the
sixmonth LIBOR rate. Buy FRA for profit of $1,461.33
, FIN 4604 Final Questions And Correct
Answers
Since the agreement rate is less than your forecast, you should buy a FRA
$*((libor-agreement)*days/360)/[1+(libor*days/360)
Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of 0.75 percent per
annum on a three-month rollover basis from Barclays in London. Suppose that three-month
LIBOR is currently 5 17⁄32 percent. Further suppose that over the second three-month interval
LIBOR falls to 5 1⁄8 percent. How much will Teltrex pay in interest to Barclays over the six-
month period for the Eurodollar loan? $91,171.88.
$3,000,000 × (0.0553125 + 0.0075)/4 + $3,000,000 × (0.05125 + 0.0075)/4 = $47,109.38 +
$44,062.50 = $91,171.88.
Your firm has just issued five-year floating-rate notes indexed to six-month U.S. dollar LIBOR
plus 1/4 percent. What is the amount of the first coupon payment your firm will pay per $1,000
of face value, if six-month LIBOR is currently 7.3 percent? $37.75
0.5 x (.073 + .0025) x $1,000 = $37.75
Answers
Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending
margin of 1.26 percent per annum on a six-month rollover basis from a London bank. If six-
month LIBOR is 4.55 percent over the first six-month interval and 5.380 percent over the second
six-month interval, how much will Grecian Tile pay in interest over the first year of its
Eurodollar loan? $93,375.00
$*(libor+margin)/2+$(2nd libor+margin)/2
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.62 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 4.935 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. Buyer pays the
seller $5,187.57
Since the settlement rate is less than the agreement rate, the buyer pays the seller the absolute
value of the FRA
, FIN 4604 Final Questions And Correct
Answers
$*[(settlement-agreement)*days/360]/[1+(settlement*days/360)]
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.52 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 6.135 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. Seller pays the
buyer $4,643.20
Since the settlement rate is greater than the agreement rate, the seller pays the buyer the absolute
value of the FRA.
$*[(settlement-agreement)*days/360]/[1+(settlement*days/360)]
A "three against nine" FRA has an agreement rate of 4.91 percent. You believe six-month LIBOR
in three months will be 5.205 percent. You decide to take a speculative position in a FRA with a
$1,000,000 notional value. There are 183 days in the FRA period. Determine whether you should
buy or sell the FRA and what your expected profit will be if your forecast is correct about the
sixmonth LIBOR rate. Buy FRA for profit of $1,461.33
, FIN 4604 Final Questions And Correct
Answers
Since the agreement rate is less than your forecast, you should buy a FRA
$*((libor-agreement)*days/360)/[1+(libor*days/360)
Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of 0.75 percent per
annum on a three-month rollover basis from Barclays in London. Suppose that three-month
LIBOR is currently 5 17⁄32 percent. Further suppose that over the second three-month interval
LIBOR falls to 5 1⁄8 percent. How much will Teltrex pay in interest to Barclays over the six-
month period for the Eurodollar loan? $91,171.88.
$3,000,000 × (0.0553125 + 0.0075)/4 + $3,000,000 × (0.05125 + 0.0075)/4 = $47,109.38 +
$44,062.50 = $91,171.88.
Your firm has just issued five-year floating-rate notes indexed to six-month U.S. dollar LIBOR
plus 1/4 percent. What is the amount of the first coupon payment your firm will pay per $1,000
of face value, if six-month LIBOR is currently 7.3 percent? $37.75
0.5 x (.073 + .0025) x $1,000 = $37.75
