## Forward Rates Calculations

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

### Forward Rates Calculations

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.
a. 6.31%
b. 12.03%
c. 12.19%
d. 12.62%

Tags:

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

### Re: Forward Rates Calculations

pankaj
Finance Junkie
Posts: 61
Joined: Fri Aug 03, 2012 11:24 am

### Re: Forward Rates Calculations

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

Thanks Pankaj

regards
Swarnendu

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

### Re: Forward Rates Calculations

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