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CHAPTER 6 - YIELD MEASURES, SPOT RATES, AND FORWARD RATES > V. FORWARD RATES
V. FORWARD RATES
We have seen how a default-free theoretical spot rate curve can be extrapolated from the Treasury yield curve. Additional information useful to market participants can be extrapolated from the default-free theoretical spot rate curve: forward rates. Under certain assumptions described later, these rates can be viewed as the market’s consensus of future interest rates.
Examples of forward rates that can be calculated from the default-free theoretical spot rate curve are the:
• 6-month forward rate six months from now
• 6-month forward rate three years from now
• 1-year forward rate one year from now
• 3-year forward rate two years from now
• 5-year forward rates three years from now
Since the forward rates are implicitly extrapolated from the default-free theoretical spot rate curve, these rates are sometimes referred to as implied forward rates. We begin by showing how to compute the 6-month forward rates. Then we explain how to compute any forward rate.