OIS rates have been estimated as 3.4 % for all maturities....

OIS rates have been estimated as $3.4 \%$ for all maturities. The three-month LIBOR rate is $3.5 \%$. For a six-month swap where payments are exchanged every three months the swap rate is $3.6 \%$. All rates are expressed with quarterly compounding. What is the LIBOR forward rate for the 3- to 6-month period.

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Key Concepts

Forward Rate

A forward rate is the implied interest rate for a future period, calculated based on current spot rates and market instruments. It reflects the market’s expectation of future short-term interest rates and is commonly derived by comparing rates of different maturities.

Compounding Conventions

Compounding conventions determine how and when interest is added to the principal balance. In this context, quarterly compounding means that interest calculations are performed every three months, which affects the calculation of discount factors and the derivation of forward rates.

Interest Rate Swaps

Interest rate swaps are derivative contracts in which two parties exchange cash flows, typically swapping a fixed rate for a floating rate. The swap rate is determined such that the present value of fixed payments equals the present value of floating payments, and it can be used to derive implied forward rates over specific periods.

Discount Factors

Discount factors are used to determine the present value of future cash flows. They are computed using the relevant interest rates and compounding conventions, and play a crucial role in linking spot rates with forward rates by discounting cash flows to the present.

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