Bond valuation via forward/spot rates

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”?


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).

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Awesome, I appreciate it!

My pleasure.