Question

Let us assume the following deposit rates: Maturity 1 year deposit 1,92 2 year deposit 2,59 Please calculate the expected forward interest rate for deposit starting at the end of first year and lasting one year (one year forward rate).

Answer 1

Forward rate at the end of year 1 = [((1 + Spot rate for year 2)^^{Number of years}) / ((1 + Spot rate for year 1)^^{Number of years})] - 1

= [((1 + 2.59%)^²) / ((1 + 1.92%)^¹)] - 1

= [1.05247081/1.0192] - 1

= 1.03264404434851 - 1 = 0.0326440443485101

Forward rate at the end of year 1 = 3.26%