Which instrument is a contract between two parties that determines the rate for a future start date?

• A. A government bond forward
• B. Forward Rate Agreement (FRA)
• C. Interest Rate Futures
• D. Sinking funds

Answer: (B)

A Forward Rate Agreement is a contract between two parties to lock in the interest rate for a loan that will start on a specified future date and run for a defined period. The agreed forward rate determines the interest payments for that future period, and at settlement the difference between the forward rate and the prevailing market rate is paid in cash on the notional amount. No principal changes hands, which is typical for FRAs. This setup specifically fixes the rate for a future start date, which is exactly what the question describes. A government bond forward fixes the price of a bond in the future, not the rate for a future borrowing period; interest rate futures are standardized, exchange-traded contracts with daily settlements; sinking funds are reserves set aside to repay debt, not rate-setting contracts.