• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

What are Forward Rates?

CFA® Exam Level 1

This lesson is part 16 of 18 in the course Yield Measures, Spot Rates, and Forward Rates

Till now we have looked at the spot rates and we also learned about how to construct spot rate curve. Essentially a spot rate is the borrowing or lending interest rate today for a specified period of time. For example, s1 refers to the one-year spot rate, i.e., the interest rate you will realize in one year. s2 represents the annualized two-year spot rate, i.e., the rate you will realize if you invest/lend/borrow for two years.

A forward rate, on the other hand, is the interest rate for the future. For example, you may want to know what will be the one-year interest rate one year from now. Similarly, you can find out what will be the 2-year forward rate one year from now. Just like spot rates, forward rates can also plotted on a graph to arrive at the forward rate curve.

Forward rates are represented with specific terminology, and once you know it, it will be very easy for you to read any forward rate. The forward rate itself is represented by an f, and there are two subscripts, one before f and the other after f, such as 1f2.

The first subscript represents the time period for which the rate applies, for example, 1-year forward rate. The second subscript represents when the forward rate begins, for example, one year from now or two years from now.

Let’s take a few examples:

1f1 represents 1-year forward rate 1 year from now.

1f2 represents 1-year forward rate 2 year from now.

1f3 represents 1-year forward rate 3 year from now.

2f1 represents 2-year forward rate 1 year from now.

2f2 represents 2-year forward rate 2 year from now.

Note that the above notations assume that each period is for one year. In some cases, you can assume one period equal to 6-months also. In that case 1f2 represents 6-month forward rate 1 year from now. Some other resources may have totally different notations, but this is the standard way of reading forward rates.

We can derive forward rates from the spot rate curve, which we will learn in our next article.

Previous Lesson

‹ Option-adjusted Spreads (OAS)

Next Lesson

How to Calculate Forward Rates from Spot Rates? ›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • Sources of Return from Investing in a Bond
  • How to Calculate Yield to Maturity
  • How to Calculate Current Yield
  • Bond Equivalent Yield Convention
  • Yield to Maturity (YTM) Approximation Formula
  • YTM and Reinvestment Risk
  • Factors Affecting Reinvestment Risk
  • Calculate Bond-Equivalent Yield of Annual-Pay Bonds
  • How to Calculate Yield to Call of a Bond
  • Cash Flow Yield
  • Bootstrapping Spot Rate Curve (Zero Curve)
  • How to Price a Bond Using Spot Rates (Zero Curve)
  • Nominal Spread
  • Z-Spread: Definition and Calculation
  • Option-adjusted Spreads (OAS)
  • What are Forward Rates?
  • How to Calculate Forward Rates from Spot Rates?
  • How to Value a Bond Using Forward Rates

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us