Fwd rates (BEY?)

If the 4 year spot rate is 10% and the three year is 12%, what is the one year forward rate three years from now?

Would you:

a) 1.1^4 / 1.12^3 to get 4.21%

b) (1.05 ^ 8) / (1.06 ^ 6) to get 4.15%

c) ((1.05 ^ 8) / (1.06 ^ 6) -1 ) / 2 ) ^ 2 to get 4.198%?

are spot rates BEYs? are forwards BEYs? is there some definitive list out there? I have tried to compile one but to no avail.

I wrote an article on BEY that may be of some help here: http://financialexamhelp123.com/bond-equivalent-yield-bey/

The short answer is “Yes.” Spot rates are presented as BEYs. Par rates are presented as BEYs. Forward rates are presented as BEYs.

Thanks. Ive read your page more than once! I now find the conversion from BEY is 2 ESAY (too easy…). If I am told whether it is a BEY or ESAY or EAR or whatever I feel I can get the right answer. Just need to memorise which is which.

What would be the actual correct answer? The method the (paid for!) mock provided was A; I get C, converting from BEY to ESAY (to allow for compounding) then back to BEY to quote in correct forward notation.

It sounds as though the author of the question intended rates to be EAYs, not BEYs.

That they didn’t specify that is stupid; third-party providers do that sort of thing often.

CFA Institute doesn’t.


A is the correct method.