Unformatted text preview: some future date to six months beyond that date. A six month loan zero years forward is actually a six month spot loan. In Figure 2.2, forward rates are higher than spot through most of the terms because they “anticipate” the spot rate of six months forward for each spot rate term. In a deflationary timeframe, the graph of forward rates would be expected to below the spot rates Bond prices can be expressed in terms of spot rates or forward rates. Intuitively, when a bond pays exactly the market rate of interest, an investor will not require a principal re-payment that is greater than his initial investment. Nor will he expect or accept a principal re-payment that is less than his original investment. Investors who extend a maturity from six months to one year earn an above-market return on that forward loan. Small changes in the spot rates of longer maturity zeros can result in large price differences....
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This note was uploaded on 12/15/2011 for the course ECON 101 taught by Professor Mimir during the Spring '11 term at Maryland.
- Spring '11