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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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 Spring '12
 LucyAckert
 Forward rate

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