In: Finance
Consider the following spot rate curve:
What is the forward rate for a 6-month zero coupon bond issued one year from today? Equivalently, the question asks for f12, where 1 time period consists of 6 months. Remember, like spot rates, forward rates are expressed as bond-equivalent yields.
Given that,
1-year spot rate r1 = 12%
18 month spot rate r1.5 = 14%
So, 6 month forward rate 1 year from now = 2*((((1+r1.5/3)^2)/((1+r1/2)^2)) - 1) = 2*((((1+0.14/2)^3)/((1+0.12/2)^2)) - 1)
=> 6 month forward rate 1 year from now = 18.06% or 0.1806