Bond valuation via forward/spot rates

CFA Level I
#1

Say you’re given a series of spot rates, 1yr 1% 2yr 2% and 3yr 3%.

For a 3 year 10% bond, the logic would be 100/1.01 + 100/1.02^2 + 1100/1.03^3.

However, if this problem is with one year forward rates, say 1yr 1%, 1y1y 2%, and 2y1y 3%

Now the same bond valuation is 100/1.01 + 100/(1.01)(1.02) + 1100/(1.01)(1.02)(1.03).

Is this correct?

And if this is correct, would you simply just be on the lookout for phrasing like 1y1y instead of “two year spot”?

Thanks!

#2

You’re correct, and the phrasing will be clear. They probably won’t write “1y1y”; they’ll tell you to use the forward rates (and they won’t give you the spot rates).

1 Like
#3

Awesome, I appreciate it!

#4

My pleasure.