Forward interest rate

Santa-Clara P, Somette D (2001) The Dynamics of the Forward Interest Rate Curve with Stochastic String Shocks. The Review of Financial Stndies 14 149-185. 

Although the use of yield curves is quite common as part of mMietaiy policy analysis, central banks such as the US Federal Reserve and the Bank of England have only recently begun to forward interest rates as an indicator for monetary... 

Svensson, L., 1994. Estimating and Interpreting Forward Interest Rates Sweden 1992-94. International Monetary Fund, Working Paper 114. 

Svensson, L., 1995. Estimating forward interest rates with the extended Nelson Siegel method. Sveriges Riksbank Quart. Rev. 3, 13. 

The forward price is calculated only for the purpose of incorporating repo interest it should not he confused with a forward interest rate, which is the interest rate for a term starting in the future and which is calculated from a spot interest rate. Nor should it be taken to he an indication of what the market price of the hond might be at the time of trade termination, the price of which could differ greatly from the sell/buyback forward price. 

The adjustment required to convert a futures interest rate to a forward interest rate. 

The cap s premium is a function of the probability that it will be exercised, based on the volatility of the forward interest rate. Caps are frequently priced using the Black (1976) model, taking the cap level as the strike and the forward rate as the underlying asset s price. The resulting equation for computing the premium is (9.13). 

Where a liquid market in indexed bonds exists across a reasonable maturity term structure, it is possible to construct a term structure of inflation rates. In essence, the process involves constructing the nominal and real interest rate term structures, then using them to infer an inflation term structure. This, in turn, can be used to calculate a forward expected inflation rate for any term or a forward inflation curve in the same way that a forward interest rate curve is constructed. 

A more accurate approach m ht be the one used to price interest tate swaps to calculate the present values of future cash flows usit discount tates determined by the markets view on where interest rates will be at those points. These expected rates ate known as forward interest rates. Forward rates, however, are implied, and a YTM derived using them is as speculative as one calculated using the conventional formula. This is because the real market interest rate at any time is invariably different from the one implied earlier in the forward markets. So a YTM calculation made using forward rates would not equal the yield actually realized either. The zero-coupon rate, it will be demonstrated later, is the true interest tate for any term to maturity. Still, despite the limitations imposed by its underlying assumptions, the YTM is the main measure of return used in the markets. 

The one-period forward interest rate one period from now is therefore 7.009%. 

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