Forward Rate Example 4030 2007

# Forward Rate Example 4030 2007 - 1.15563/1.06500 = 1.08509...

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Calculate Forward Rates From Spot Rates Year 1 Year 2 Year 3 1 year spot 6% 1. If the three year spot rate is 9%, what is the one year forward rate starting two years from today? (1+ .09)^3 = \$1.29503 = FV of \$1 in three years (1+.06)x(1+.08) = \$1.14480 = FV of \$1 in two years 1.29503/1.14480 = 1.13123 = 1 + period 3 return 1.13123-1= 13.12% = Answer Year 1 Year 2 Year 3 1 year spot 6.5% 2. If the three year spot rate is 10% and the two year spot rate is 7.5%, what is the one year d rate starting two years from today? (1.10)^3 = 1.33100 = FV of \$1 in three years (1+.075)^2 = 1.15563 = FV of \$1 in two years 1.33100/1.15563 = 1.15176 = 1 + period 3 return 1.15176-1 = 15.18% = Answer 3. For the same example, what is the one year forward rate starting one year from today? (1+.075)^2 = 1.15563 = FV of \$1 in two years (1+.065)^1 = 1.06500 = FV of \$1 in one year

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Unformatted text preview: 1.15563/1.06500 = 1.08509 = 1 + period 2 return 1.08509-1 = 8.51% = Answer 1 year forward, starting one year from today 8% 1 year forward, starting two years from today? 1 year forward, starting one year from today ? 1 year forward, starting two years from today? Calculate Spot Rates From Forward Rates Year 1 Year 2 Year 3 1 year spot 5% 1. Calculate the two year spot rate (1+.05)x(1+.065) = \$1.11825 = FV of \$1 in two years (1.11825)^.5 = 1.05747 = 2 year spot + 1 1.05747 - 1 = 5.75% = Answer 2. Calculate the three year spot rate (1+.05)x(1+.065)x((1+.08) = \$1.20771 = FV of \$1 in three years (1.20771)^.3333333 = 1.06493 = 3 year spot + 1 1.06493 - 1 = 6.49% = Answer 1 year forward, starting one year from today 6.5% 1 year forward, starting two years from today 8%...
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Forward Rate Example 4030 2007 - 1.15563/1.06500 = 1.08509...

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