X has a 3 million dollar floating rate loan which is re-set every six months. The company wants to protect itself against a rising interest rate in the next six months. It purchases a 3% 6 v/s 12 Forward Rate Agreement ( FRA ) on a notional amount of 3 million dollar. At the start date of the FRA, the market interest rate on floating rate debt is 3.5 % per annum. (i) Calculate the amount receivable by X from the writer of the FRA at the beginning of the FRA period, assuming 30-day months in a year. (ii) Calculate the interest payable by X to the providers of finance at the end of month 12. (ii) Calculate the actual interest cost of the loan and justify your answer.
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
X has a 3 million dollar floating rate loan which is re-set every six months. The company wants to protect itself against a rising interest rate in the next six months. It purchases a 3% 6 v/s 12 Forward Rate Agreement ( FRA ) on a notional amount of 3 million dollar. At the start date of the FRA, the market interest rate on floating rate debt is 3.5 % per annum.
(i) Calculate the amount receivable by X from the writer of the FRA at the beginning of the FRA period, assuming 30-day months in a year.
(ii) Calculate the interest payable by X to the providers of finance at the end of month 12.
(ii) Calculate the actual interest cost of the loan and justify your answer.
Step by step
Solved in 2 steps
