 # Forward Rates

Ok I’m having a little trouble understanding forward rates in the FI section (2006). The book asks me to calculate (assuming it is Jan): A. 1-year for Jan, 2012 B. A 3-year for Jan, 2012 C. The Yield on a 3-month bond for March 3, 2008 Is there a set formula for solving these? I think A. the forumula be (1+Spot Rate for Jan, 2012)^4 = ? * (1+1 year forward rate) Let me know what you guys think and if any of you can help me. Thanks.

A. (1 + 5-yr Spot)^5 = (1 + 4-yr Spot)^4 * (1 + 1-yr forward rate 4yrs from now) Solve for the 1-yr forward rate 4 yrs from now (1-yr Jan2012). B. (1 + 7-yr Spot)^7 = (1 +4-yr Spot)^4 * (1 + 3-yr forward rate 4yrs from now)^3 C. (1 + 6mo ann. Spot ^1/4)^2 = (1 + 3mo ann. Spot^1/4) * (1 + 3mo ann. Spot 3mo from now^1/4) note: Adjust the annualized 6 and 3month spot rates have been adjusted here by scaling them down to 3 month spot rates You may have to bootstrap the theoretical forward rate curve in order to get some of these rates.

I see everything, but C. Its asking for a yeild on a 3-month bill, that is 2 months away? I don’t see the logic behind using 6 month rates? The question gives Jan-Aug rates, but I still do not follow the logic or formula behind obtaining the desired number.

Oh yeah March 3 eh… I was thinking 3 months from now instead of 2 Depending what you’re given it could look like this: (1 + 5mo Spot^1/12)^5 = (1 + 2mo Spot^1/12)^2 * (1 + 3 mo spot 2 months from now^1/12)^3 Again, using annualized rates and adjusting to monthly rates.