Days on which reference rates reset | LIBOR

CFA Level I Derivatives
#1

Hi all,

This is one that always confuses me…

A question is asking to calculate an interest payment 90 days from now. The answer states the LIBOR rate to use would be 4%. Why wouldn’t it be 4.5% when it is stated “4.5% 90 days from now”!??? (Schweser, Book 5, p.213).

90 day LIBOR is currently 4%.

90 day LIBOR rates:

4.5% 90 days from now.

5.0% 180 days from now.

5.5% 270 days from now.

6.0% 360 days from now.

#2

think about it this way. lets say you take out a loan that is due in 90 days. does the bank charge you the rate the give you today or the rate that will be in 90 days?

#3

LIBOR rates are set in advance and paid in arrears.

For a 90-day loan the rate is set at today’s LIBOR rate, and you’ll pay the interest in 90 days.

#4

Thanks guys! what is funny is in a couple of sentences I change from confusion to “that’s totally obvious, what is wrong with me!”

#5

You’re quite welcome.

#6

you’re welcome