USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market:

-Refer to Exhibit 15.3. What is the implied 90-day forward rate at the beginning of the third quarter?
A) 5.10%
B) 5.47%
C) 4.70%
D) 4.85%
E) 0%

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market:
 
-Refer to Exhibit 15.3. What is the implied 90-day forward rate at the beginning of the third quarter?
A) 5.10% 
B) 5.47% 
C) 4.70% 
D) 4.85% 
E) 0%

Quizplus · Accepted Answer

Looking at the forward rates, we can see:

- 90-day forward rate between Q1 and Q2 = 5.3%
- 90-day forward rate between Q2 and Q3 = 5.6%

To calculate the implied 90-day forward rate at the beginning of Q3, we can use the formula:

(1 + 0.056/4)^4 / (1 + 0.053/4)^3 - 1 = 5.47%

So the correct answer is B, 5.47%.