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Unformatted text preview: 4 5.0 6.2 = R3,4 5 5.3 6.5 = R4,5 6 Formula for Forward Rates Suppose that the zero rates for time periods T1 and T2 are R1 and R2 with both rates continuously compounded. The forward rate for the period between times T1 and T2 is 7 R T R T T T 2 2 1 1 2 1Upward vs Downward Sloping Yield Curve If the yield curve is upward (downward) sloping, the forward rate is always above (below) the zerocoupon. The zerocoupon is the average of forward rates. If the yield curve is upward (downward) sloping, coupon bond yield is always below (above) the zerocoupon. Some coupon payments are before maturity and the discount rates are lower than those applying at maturity. For an upward sloping yield curve: Forward Rate > Zero Rate > Bond Yield For a downward sloping yield curve Bond Yield > Zero Rate > Forward Rate 8...
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This note was uploaded on 01/19/2012 for the course FIN 4520 taught by Professor Lucyackert during the Spring '12 term at Kennesaw.
 Spring '12
 LucyAckert

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