F13 Forward Rates

Question 1

what are forward rates?

Answer 1

Forward rates are rates of interest that can be earned on an investment made at a future point in time.

Unless stated otherwise assume forward rates are annual effective rates.

Question 2

what is meant by f_t, t+m?

Answer 2

An m-year spot rate that comes into effect t-years in the
future will be referred to as the “m-year forward rate,
deferred t years” or as the “m-year forward rate, starting in
t years”

Question 3

what is the formula for f_t,t+m?

Answer 3

f_t, t+m =
[((1 + s_t+m)^(t+m))/(1+s_t)^t] - 1

Question 4

Write the 1-year forward rate, starting in 4 years in terms of
the 4-year and 5-year spot rates.

Answer 4

(1+s_4)^4 * (1 + f_4,5)^1 = (1 + s_5)^5