Tgirl

[Tgirl]

Up

4

::

The formulae is not actually right….. I cld not key in the other factors. I hope you can make sense out of this. Thanks

[Tgirl]

Up

2

::

“Implied forward rates (also known as forward yields) are calculated from spot rates. An implied forward rate is a break-even reinvestment rate. It links the return on an investment in a shorter-term zero-coupon bond to the return on an investment in a longer-term zero-coupon bond. Suppose that the shorter-term bond matures in A periods and the longer-term bond matures in B periods. The yields-to-maturity per period on these bonds are denoted zA and zB. The first is an A-period zero-coupon bond trading in the cash market. The second is a B-period zero-coupon cash market bond. The implied forward rate between period A and period B is denoted IFRA,B–A. It is a forward rate on a security that starts in period A and ends in period B. Its tenor is B – A periods.
Equation 14 is a general formula for the relationship between the two spot rates and the implied forward rate.
A B−A B (1+zA) ×(1+IFRA,B−A) =(1+zB)

Suppose that the yields-to-maturity on three-year and four-year zero-coupon bonds are 3.65% and 4.18%, respectively, stated on a semiannual bond basis. An analyst would like to know the “3y1y” implied forward rate, which is the implied one-year forward yield three years into the future. Therefore, A = 6 (periods), B = 8 (periods), B – A = 2 (periods), z6 = 0.0365/2 (per period), and z8 = 0.0418/2 (per period).

Institute, CFA. CFA Institute Level I 2014 Volume 5 Equity and Fixed Income. John Wiley & Sons P&T, 2013-07-12. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.
(Institute 433)

[Author]

Posts