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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 thetreasurer can get a rate of 7.7%for a 6-monthforwardrateagreement (FRA) starting in 3 months' time. By transacting an FRA thetreasurer can lock in a rate today of 7.7%.
If interest rates are 8.5%in 3 months' time,what willthe net amount payable be?
Give your answer to the nearestthousand dollars.
Suggested Answer: A
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26 comments · newest first
AL
Almeta
3 months ago
Total payable would be $107,000. It’s all about the interest difference!
PA
Paulina
4 months ago
If rates hit 8.5%, we need to calculate the difference.
AM
Amie
4 months ago
I think the FRA is a good move. Locking in 7.7% seems smart.
AV
Avery
4 months ago
This question is tricky. I feel a bit anxious about it.
EL
Elliott
6 months ago
Totally agree, locking in at 7.7% seems smart!
RE
Rebbeca
6 months ago
Wait, how can we be sure rates will actually rise?
RE
Rebbecca
6 months ago
If rates hit 8.5%, that’s a big jump!
MA
Margery
6 months ago
Current rate is 7.2%, but FRA locks in at 7.7%.
RE
Reid
6 months ago
The loan amount is $2 million with a 6-month interest reset.
RU
Ruthann
6 months ago
Forget the numbers, I'm just here for the free coffee and donuts.
MI
Michal
7 months ago
If I can't use a calculator, I'm just going to guess and hope for the best.
LE
Lenna
7 months ago
Wait, we're supposed to do math? I thought this was a multiple-choice quiz on astrology.
AL
Aleshia
7 months ago
Hmm, 8.5% in 3 months? Time to break out the crystal ball and predict the future!
MO
Mona
7 months ago
7.7% is the way to go, lock it in and avoid the 8.5% hike!
AN
Andree
7 months ago
I feel like we did a problem where we had to determine the impact of a rate change on loan payments. I hope I remember the formula correctly for this one!
HA
Hana
7 months ago
I think the loan amount is $2 million, so we’ll need to calculate the interest based on that. But I’m a bit confused about how to apply the rates.
AU
Audria
8 months ago
If rates go up to 8.5%, we’ll need to compare that with the locked-in rate of 7.7% to find the difference, right?
EZ
Ezekiel
8 months ago
I remember we practiced calculating the net amount payable in a similar question, but I’m not sure how to factor in the FRA correctly.
TI
Tiera
9 months ago
I'm feeling pretty confident about this. As long as I plug the numbers in correctly, I should be able to get the right answer.
KR
Kristel
9 months ago
This looks tricky, but I think I can figure it out. I just need to make sure I'm keeping track of all the dates and rates correctly.
FE
Fernanda
9 months ago
Okay, let me break this down. We have a $2 million loan, the current 6-month rate is 7.2%, and the treasurer can lock in a 7.7% rate with an FRA. Then we need to calculate the net amount payable if rates are 8.5% in 3 months.
OD
Odelia
9 months ago
Hmm, I'm a bit confused about the different interest rates and time periods involved. I'll need to carefully work through the details step-by-step.
RA
Raina
9 months ago
I think I can handle this one. The key is to understand how the FRA works and how it affects the interest payment.
ER
Erin
3 months ago
Exactly! But what if rates hit 8.5%?
CA
Cassie
3 months ago
Right, so if rates go up, we still pay 7.7%.
CO
Corrinne
3 months ago
I see the FRA locks in the 7.7% rate.