The interest rate at which a forward rate agreement (FRA) is traded. In other words, it is the agreed rate of interest at which a notional cash amount (FRA notional) will be borrowed or lent for a period of time up to a year, commencing any time over the course of 12 months. The settlement amount of an FRA (which is paid by one party to the other on the settlement date) is the difference between the FRA rate and the reference rate expressed as a percentage of the notional amount.
In general, it is a function of the 3-month LIBOR rate. A rise in this rate will cause FRA rates to rise, and vice versa.
It is also known as the contract rate of an FRA.
