Question: 1 Forward Rates A Forward Rate represents a future interest rate between two points in the future, i.e. the 7 year interest rate starting three

1 Forward Rates A Forward Rate represents a future interest rate between two points in the future, i.e. the 7 year interest rate starting three years from now. As such it is the rate from year 3 to year 10 3 4 6 7 9 10 11 12 234 13 Forward Rate Formula: Forward Rate = (R2*T2 - R1*T1) / (T2 - T1) 14 15 16 17 18 19 20 21 22 23 24 25 26 One year rate in Yr 5 = 27 Spot Yield Curve Rate Year 1234 4 569 00 8 10 135.00% Forward 1-Yr rates 124.00% 120.00% 115.50% 111.50% 109.00% 106.50% 105.25% 103.80% 102.40% 28 29 What is the 5-yr rate starting in year 5? 30 31 32 113.00% End of yr 1 to end of yr 2 112.00% End of yr 2 to end of yr 3 102.00% 95.50% 96.50% 91.50% 96.50% 92.20% 89.80% ... 800 where: 000 R2 is the longer Rate T2 is the longer Time R1 is the shorter Rate T1 is the shorter Time 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 1 2

A Forward Rate represents a future interest rate between two points in the future, i.e. the 7 year interest rate starting three years from now. As such it is the rate from year 3 to year 10

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