Term structure of interest rates (intro)
General · Mathematics
Study notes
Q: 1yr spot 5%, 2yr spot 6%. Find 1yr forward rate starting year 1. (1+s₂)² = (1+s₁)(1+f). (1.06)² = 1.05(1+f): 1.1236/1.05 = 1.0701. f = 7.01%! Forward > spots (upward curve!). Yield curve: plot s_t vs t! (Forwards from spots!)