CFA CFA Level 1 Computing Implied Forward Rates

Computing Implied Forward Rates

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    • Avatar of cfastafcfastaf
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        This is the full question:

        (1+zA)A x (1+IFRA,B-A)B-A – (1+zB)B

        Suppose that the yields-to-maturity on a 3-year and 4-year zero coupon bonds are 3.5% and 4% on a semi-annual basis. The “3y1y” implies that the forward rate could be calculated as follows:

        A = 6 periods

        B = 8 periods

        B-A = 2 periods

        z6 = 0.035/2 = 0.0175

        z8 = 0.04/2 = 0.02

        (1+0.0175)6 x (1+IFR6,2)2 = (1+0.02)8

        IFR6,2 = 0.0275

        The “3y1y” implies the forward rate or forward yield is 5.50% (0.0275% x 2)

      • Avatar of mincemeat23mincemeat23
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          Can’t understand the notation well enough – in any case wouldn’t the answer show the calculations?

        • Avatar of mincemeat23mincemeat23
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            This one doesn’t seem right. Replacing IFR6,2 with 0.0275 in the LHS equation doesn’t yield the RHS.

            Edit: You posted the wrong notation, it’s (1+0.0175)^6 x (1+IFR6,2)^2 = (1+0.02)^8

            (1+0.0175)^6 x (1+IFR6,2)^2 = (1+0.02)^8

            1.0175^6 x (1+IFR6,2)^2 = 1.02^8

            1.1097 x (1+IFR6,2)^2 = 1.1717

            (1+IFR6,2)^2 = 1.1717 / 1.1097

            (1+IFR6,2)^2 = 1.0558

            1+IFR6,2 = 1.0558^(1/2)

            1+IFR6,2 = 1.0275

            IFR6,2 = 0.0275 

          • Avatar of mincemeat23mincemeat23
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              What? Your original question and follow-ups seems totally different, even the answers.

            • Avatar of cfastafcfastaf
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                Yea its just a different question but would use the same concept to get to the answer….I just thought i send you a full version of a question i found online. please note the 6, 2 and 8 after the bracket in the equation is to the power of 6, 2 and 8

              • Avatar of cfastafcfastaf
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                  any input on this one Min?

                  its mainly here I’m getting lost with the algebra:

                  (1+0.0175)6 x (1+IFR6,2)2 = (1+0.02)8

                  IFR6,2 = 0.0275

                • Avatar of cfastafcfastaf
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                    Maybe this is easier to see, how do they get to that answer, this is all that is given

                    (1+0.0175)6 x (1+IFR6,2)2 = (1+0.02)8

                    IFR6,2 = 0.0275

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