Question

The Term Structure shows the following Spot Rates:

Maturity in years	1	2	3	4	5
spot rate in %	1.8	2.1	2.6	3.2	3.5

What is the implied 2-year forward rate two years from now? What is the implied 3-year forward rate two years from now?

Answer 1

Annualized Forward rate of 2 years 2 years from now =((1+4 Year rate)^4/(1+2 Year rate)^2)^1/2-1

Annualized Forward rate of 2 years 2 years from now=((1+0.032)^4/(1+0.021)^2)^1/2-1

Annualized Forward rate of 2 years 2 years from now % = 4.31

Annualized Forward rate of 3 years 2 years from now =((1+5 Year rate)^5/(1+2 Year rate)^2)^1/3-1

Annualized Forward rate of 3 years 2 years from now=((1+0.035)^5/(1+0.021)^2)^1/3-1

Annualized Forward rate of 3 years 2 years from now % = 4.44