If interest rates are 8.5% in 3 months’ time, what will the net amount payable be?

CORRECT TEXT

M plc has a $2 million loan outstanding on which the interest rate is reset every 6 months for the following 6 months and the interest is payable at the end of that 6-month period. The next 6-monthly reset period starts in 3 months and the treasurer of M plc thinks that interest rates are likely to rise between now and then.

Current 6-month rates are 7.2% and the treasurer can get a rate of 7.7% for a 6-

month forward rate agreement (FRA) starting in 3 months’ time. By transacting an FRA the treasurer can lock in a rate today of 7.7%.

If interest rates are 8.5% in 3 months’ time, what will the net amount payable be?

Give your answer to the nearest thousand dollars.

View Answer

Answer: $77000