What instruments are settled using arrear rates?

CFA Level I
#1

I remember to have seen some cases in FRA or something where the arrear rates or prior period ending rates are used in calculating the settlements. Do anybody know what I am talking about? Thanks in advance

#2

Interest rate swaps using LIBOR is how I saw it in the text. The Libor (floating rate payment) rate will be set at the beginning of the period even though the payment will be made at the end of the period. Thus-it can be understood that the rate is set in arrears. Set in the beginning but paid at the end.

#3

The interest portion of an Equity Swap is settled in arrears I believe.

#4

Thanks okiew5… do you know how we can identify that we should use arrear rates instead (I guess the trick would be to give all 0-4 rates and they want you to use pd 3 to calc pd 4 payment)… excuse my language

#5

Can any use an example? if possible

#6

A corp will issue fixed rate bonds and wants to convert that fixed rate debt to floating rate debt. Thus the corporation will enter into an interest rate swamp with a bank which is offering LIBOR. The bank will be paying the corporation LIBOR, which is set at the beginning of the 6 months if the coupons are paid semi-annually. Currently, when they enter into the transaction…say LIBOR is at 4.00%, but 6 months from now…LIBOR is at 5.00%…you will be receiving the payment if 2.00 (coupons are paid semi-annually) regardless that the LIBOR went up to 5. However, next period you will be receiving 2.5…thats arrears for ya. Take note that the difference is netted and based upon this difference, the bank or the corp will be receiving a cash payment. Hope this helps.