# Spot rates and forward

Can someone explain this: Time Annual spot rate(%) 1 15 2 12.5 3 10 4 7.5 Q- one year forward rate two year from now. I am confused with the time scale as well. Thanks S

I suck at forwards and spots so two years from now you need to calculate the one year forward rate. 1.10^3 / 1.125 ^2 = 1.051 - 1= 5.1% ??? Is this right?

that’s right Mr Bond ! I really get lost with these. S

s here’s my best to explain forward rates. I gave up on them a long time ago, then one day dedicated 12 hours to it, and it finally clicked. the one year forward rate, one year from now. Here’s how I would solve this q 1. one year forward rate, two years from now = 1 F 2 2. the text book then says to do these steps: 3. Figure out what T and M are. In this example T = 1 (one year forward rate) and M =2 (two years from now) 4. This is important: M = DENOMINATOR. FIRST FIGURE OUT THE DENOMINATOR. They want two years from now. Two years from now, the denominator is (.125 + 1 =1.125) BECAUSE THEY WANT TWO YEARS FROM NOW, IT WILL BE 1.125, TO THE SECOND POWER. 5. Now we figure out the numerator. T= 1, so we add ONE period to M, which would give us a rate of 10, and AND WE TAKE (1.10) THE THE THIRD POWER, WHICH IS 1 F 2 (COMES TO A TOTAL OF THREE). in summary First do denominator: 1.125(2) Now do the numerator: 1.1 (3) Now do the math: 5.16%