Yield Curve Movement and the Forward Curve - help!

CFA Level II Fixed Income
#1

Hi All - can anyone please explain this section (2.3) of reading 42 (pages 232-233) in more simple terms? I now understand up to equation 7 after working through the chapter repeatedly:

F(T*,T) = P(T*+T)/P(T*)

But then the next one kills me:

P*(T) = (Pt+T)/P(t)

And so on. This sentence also gets me:

“Suppose the discount function at Year 1 is the same as the forward discount function implied by the Year 0 spot curve”. Eh?!

This seems like a very important concept but I just can’t grasp it. Many thanks!

#2

It’s a no arbitrage principle. The yield for investing in a two year zero bond starting at year three (locked in today), and a three year zero bond today, should be the same as investing in a five year zero bond today.