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Let us follow the table given below:

Extracting Forward Interest Rates 23

 

Let us refer to our discussion of yield curve and recall the values. Substituting those values, we get:

Extracting Forward Interest Rates 24

 

Calculating the holding rates of interest in the second column, we get:

Extracting Forward Interest Rates 25We know r 0, 1=2.23%. In the same way, the implied future rates can also be calculated:

Extracting Forward Interest Rates 26r1, 2 and r 2,3can be determined as:

Extracting Forward Interest Rates 27

 

Extracting Forward Interest Rates 28

Putting these values in the table, we get:

Extracting Forward Interest Rates 29

As all the forward interest rates have been obtained, the yield curve can be plotted. The annualized interest rate is the geometric average of all the years taken into the calculation. If we know the average interest rate and the first half of the average, then the second half can be calculated.