Fixed Income Reading 55

At the bottom of printed page 240, we’re valuing the cash flow in period 3. They discount the cash flow by using the forward rates of 1F1, 1F2, and 1F3 to discount CF3. Shouldn’t they be using 1F0, 1F1, and 1F2? So the current spot rate, and the forward rates 6 months and 1 year from now?


1f1 means the 6-month spot rate after 6 months, which, to make it a simplified example, is the rate you will be quoted for a 6-month CD, after 6 months from now. I agree, they should discount using 1F0 which is 3.00% in the example. We already know today’s 6-month spot rate. If we get a coupon after 6 months from now it is worth less, and we discount using the current 6-month rate. However, I remember reading it last year without a hitch, so may be I’m missing something today.