Hi everyone! Need some serious help regarding module 24.5 from Schweser (Fixed Income, Determining an Optimal Strategy).
In the reading, it states the following:
"Notice an important interpretation of the forward rate: Any bond maturing in n periods that trades at its implied forward rate in one year, when it is an n – 1 to remaining maturity bond, will have the same realized return as today’s 1-year (one-period) bond. If all bonds trade at their forward rates in one year, all bonds will have had the same realized return as today’s 1-year bond: 1.50%."
Could someone help explain to me why this is the case? Why do all bonds generate the same 1-period return if the future spot rates are consistent with current forward rates?
Admittedly, my lack of knowledge on this topic could be due to the fact that I took a year off from level II before sitting for level III and now I’ve forgotten basic spot/forward rate building blocks…
Thanks a bunch everyone