Company A enters into a FRA with Company B in which Company A obtains a fixed interest rate of 5% on a face value of $1 million in one year. In return, Company B receives the one-year LIBOR rate set in three years on the nominal amount. The contract is settled in cash in a payment method at the beginning of the term period, with interest in an amount calculated with the rate of the contract and the duration of the contract. The futures market is very liquid and allows investors to enter and exit at any time. In other words, a term interest rate agreement (FRA) is a tailor-made, non-payment financial futures contract on short-term deposits. The company`s management believes that with a variable interest rate, it can generate better cash flow. In this case, TSI may enter into a swap with a counterparty bank in which the entity receives a fixed interest rate and pays a variable interest rate. The swap is structured to match the duration and cash flow of the fixed-rate loan, and the two fixed-rate cash flows are offset. TSI and the bank choose the prime variable rate index, which is usually LIBOR for a period of one, three or six months.
TSI then receives the LIBOR more or less a spread reflecting both the interest rate conditions in the market and its credit quality. A term rate is an interest rate applicable to a financial transaction that will take place in the future. Forward interest rates are calculated from the spot interest rate and adjusted for carry costs to determine the future interest rate, which equates the overall return on a longer-term investment with a roll-through transfer strategy of a shorter-term investment. . . .