For the calculation of the forward rate for f(0,1,1.5) , the formula f(t,T,S) = 1/(S-T) * ln ( (P(t,T)/P(t,S) ) only works when I used the bond price for t=1.5 if there are no coupon payments. when calculating the forward rate, should we always ignore coupon payments? Thanks in advance
The short answer is yes. The value of P(t,T) in the formula mentioned above is the price of a Zero Coupon Bonds i.e. no coupon payments. Intuitively, if I just tell you from 0-1 int rate is 10.54% and 0-1.5 int rate is 10.68%, after I get to time 1, how much % interest annualised do I need? Thats your forward rate. You would get the same answer with any nominal value, but obviously coupons would skew your answer and wouldn't reflect market interest rates.
