Forward Rates Handout

Forward Rates Handout - Forwardt Rates from class on...

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Page 1 of 3 Pages Forwardt Rates – from class on 2/1/2011 During class today, I was walking through the usual development of nominal (spot) rates and forward rates, based on real rates plus inflation. This is an example: Year K* Average Inflation Average Nominal Forward K* Inflation Rates Rates 1 1.00% 3.00% 2 2.00% 4.00% 3 3.00% 5.00% 4 3.00% 4.00% 5 4.00% 3.00% The Average K* (average real rate) is just as we did in class – the average of the expected annual real rates. Average K* 1 = 1.00% (starting point) Average K* 2 = (1% + 2%) / 2 = 1.5% Average K* 3 = (1% + 2% + 3%) / 3 = 2.0% … and so on. Year K* Average Inflation Average Nominal Forward K* Inflation Rates Rates 1 1.00% 1.00% 3.00% 2 2.00% 1.50% 4.00% 3 3.00% 2.00% 5.00% 4 3.00% 2.25% 4.00% 5 4.00% 2.60% 3.00% … and the Average Inflation Premium (Average IP) is just as we did in class – the average of the expected annual inflation rates. Average IP
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This note was uploaded on 02/08/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Forward Rates Handout - Forwardt Rates from class on...

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