Using this data on how to calculate the approximate formula, without the bond prices

	India
1Y	5.69%
2Y	5.78%
5Y	6.29%
10Y	6.60%
20Y	7.03%
30Y	7.06%

Using this data on how to calculate the approximate formula, without the bond prices, we can calculate future discount rates / forward rates in excel

(1+ DR1) (1+ DR2) = (1+YTM₂)²

Solutions

Expert Solution

The Discount or Forward Rates can be calculated from the Spot rates using the Expectation hypothesis.

The Forward rate for 1 year prevailing after 1 year 1f1 can be calculated as

1f1= (1+ 2 year spot rate)^2/(1+1 year spot rate) -1

= 1.0578^2/1.0569 -1

=0.0587008 or 5.87%

Similarly

The Forward rate for 3 year prevailing after 2 years 2f3 can be calculated as

2f3= ((1+ 5 year spot rate)^5/(1+2year spot rate)^2)^(1/3) -1

= (1.0629^5/1.0578^2)^(1/3) -1

=0.06631 or 6.63%

In general

The Forward rate for n year prevailing after x years xfn can be calculated as

xfn = ((1+(x+n) year spot rate)^(x+n)/(1+x year spot rate)^x)^(1/n)-1

jeff jeffy answered 2 years ago

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