YouTube T3-11: Forward rates are implied by zero rates

[Nicole Seaman]

Forward rates link two zero (aka, spot) rates by ensuring your expected return is the same between two choices: (1) invest at the longer-term spot rate versus (2) invest at the shorter-term spot rate and "roll over" into the implied forward rate. This is an implied forward rate that ignores other factors such as liquidity preference.

David's XLS is here: https://www.dropbox.com/s/1956swusu1l25i7/041818-forward-rates.xlsx?st=58w1w2qj&dl=0

 

[JMars7424]

Hi I am really having trouble calculating the rate at the end with calculating the discrete rate. i get .052 Could someone please help me with the calculations? thanks

 

[David Harper CFA FRM]

@JMars7424 If the z(4.0) = 5.0% and z(5.0) = 5.30% with annual compound frequency, then f(4.0, 5.0) = 1.053^5/1.050^4 - 1 = 6.509%. Thanks,