# Forward Rates

Hi

Came across a practice question that provides two series of forward rates:

F(n-1,1) ….i understand this is (n-1) year forward rate, 1 year from today

F(1,n-1) …..1 year forward rate, (n-1) years from today

Not sure how to interpret and use above series to get holding period return given spot rates….

thanks..

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Can you post the question?

summary of ques is:

5 year spot rate = 7%

F(1,4) = 8.02%

F(4,1) = 11.10%

Answer:

1 year holding period return is 3% as follows..

(1.07)

^{5}=

(1.03)

^{1}* (1.0802)^{4}i dont get why F(1,4) is used instead of F(4,1)

Your interpretation of the notation is backward.

F(1,4) is the annualized forward rate beginning 1 year from now and for a duration of 4 years (i.e., ending 5 years from now). So F(1,4) is the four year forward rate, one year from today.

Edit: Corrected typo

Studying With

It would be the one year forward rate, beginning in four years.

These two sentences seem to contradict each other.

Check the 2019 Level II curriculum, volume 5, p. 7, paragraph 5:

F(T^{*},T) means theT-period forward rate starting at timet=T^{*}.So

F(1, 4) means the 4-year forward rate beginning one year from today, andF(4, 1) means the 1-year forward rate beginning four years from today.Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams

http://financialexamhelp123.com/

O i get it …my bad…

thanks

Thanks for pointing out - have corrected the typo