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Unformatted text preview: The forward rate of interest for three months beginning in 1 year is 9.102%. The zero interest rate for 15 months is 8.6% with continuous compounding. The principal is $1,000,000 and the forward interest rates are expressed with quarterly compounding. 5 FRA Example Continued This FRA has positive value because, according to the agreement, the holder earns a rate that is higher than the current forward rate. VFRA= 1,000,000(.25)(.095.09102)e0.086*1.25 = $893.59 6 Theories of the Term Structure Page 93 Expectations Theory: forward rates equal expected future zero rates Market Segmentation: short, medium and long rates determined independently of each other Liquidity Preference Theory: forward rates higher than expected future zero rates 7...
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This note was uploaded on 01/19/2012 for the course FIN 4520 taught by Professor Lucyackert during the Spring '12 term at Kennesaw.
 Spring '12
 LucyAckert
 Interest

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