Forward Rates Calculations

swarnendupathak
Finance Junkie
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Joined: Mon Sep 17, 2012 11:06 am

Forward Rates Calculations

Postby swarnendupathak » Thu Oct 18, 2012 2:52 pm

Hi, Have a doubt, in the below mentioned problem, the correct answer of forward rate is 12.19% with calculation method of (1 + R7)^7 = (1 + R6)^6(1 + F67) & slove for F67. But with the other method of (R2*T2-R1*T1)/(T2-T1) i am getting answer of 12.03%, please help. The problem is:

A seven-year zero-coupon bond carries an annual yield of 6.75% and a six-year zero-coupon bond carries an annual yield of 5.87%. Calculate the one-year forward rate 6 years from now. Assume annual compounding.
Choose one answer.
a. 6.31%
b. 12.03%
c. 12.19%
d. 12.62%

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swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Forward Rates Calculations

Postby swarnendupathak » Fri Oct 19, 2012 9:23 am

Can anyone reply to this please............

pankaj
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Re: Forward Rates Calculations

Postby pankaj » Fri Oct 19, 2012 4:30 pm

Using the later formula you will get 12.03 which is a continuously compounding figure, but if you look at the question the other two yields are given in annual number, which indicates you need to use the former formula as it takes care of annualized figures.

Or you can convert the two yields (annualized number) into continuously compounding number and then use the second formula to calculate the forward rate.

Hope this helps!

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Forward Rates Calculations

Postby swarnendupathak » Fri Oct 19, 2012 4:42 pm

Thanks Pankaj

regards
Swarnendu

kvvallabh
Posts: 1
Joined: Wed Oct 10, 2012 4:36 pm

Re: Forward Rates Calculations

Postby kvvallabh » Wed Oct 24, 2012 1:02 am

Yes, that's correct. Thanks Pankaj for elaboration. It did help me as well.


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