# Fixed Income-Term Structure of Interest Rates

I understand that we use the same concept that we studied in L1 in the Forward Rate Model - (1 + zA)A × (1 + IFRA,BA)BA = (1 + zB)B

But I am not able to internalize the concept of the Forward Pricing Model. Can someone pls help or suggest some reading on the net.

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I think you can use S2000’s web page. He charges a symbolic fee though.

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Ok..I dont understand the Forward Pricing Model that is discussed in Term Structure of Interest Rates. Why are we multiplying P(T*)F(T*,T)? These are prices, right?

The forward pricing model describes the valuation of forward contracts. The no-arbitrage argument that is used to derive the model is frequently used in modern financial theory; the model can be adopted to value interest rate futures contracts and related instruments, such as options on interest rate futures.

The no-arbitrage principle is quite simple. It says that tradable securities with identical cash flow payments must have the same price. Otherwise, traders would be able to generate risk-free arbitrage profits. Applying this argument to value a forward contract, we consider the discount factors—in particular, the values P(T*) and P(T* + T) needed to price a forward contract, F(T*,T). This forward contract price has to follow Equation 2, which is known as the forward pricing model.

Equation (2)

P(T* + T) = P(T*)F(T*,T)

I did not understand why we are talking about no arbitrage condition in Local Expectations theory. Not able to join the dots. Can someone help me pls. And why dont we talk about no arbitrage in Pure Expectations theory?