### Forward Curve

Also known as "forward rate curve"

#### Implied Forward Rates

These are "implied" forward rates.

The forward yield is the interest rate implied by a zero coupon rate.

Forward rates are a type of market view on where interest rates will be (or should be) in the future

Forward rates are the markets expectation of future rates.

Forward rates are not a prediction of future rates.

The forward yield curve is a plot of forward rates against maturity.

The forward yield curve is the interest rate implied by the zero coupon rates for period of time in the future.

#### Assumptions

1) Markets should be arbitrage free (ie you cant make money unless there is a risk involved)

2) A 1 year investment in treasury bills should produce the same return as 2 consecutive 6-month investments in treasury bills.

The 6-month rate you would get four 6-months periods from now is know as the 2 year forward rate denoted:

notation = 4f1

The forward (or forward-forward) yield curve is a plot of forward rates against term to maturity.

#### Relationship between Spot and Forward

There is a mathematical equivalence between spot rates and forward rates.

We can see that the spot yield is the geometric mean of the forward rates.

© 2021 Better Solutions Limited. All Rights Reserved. © 2021 Better Solutions Limited TopPrevNext