S
sonnyshook
Member
Year 1
Zero rate = 3.0
Year 2
Zero Rate = 4.0
Forward rate = 5.0
If an investor borrows £100 at 3% for 1 Year and then invests the money at 4% for 2 years the result is an outflow of 100e0.03x1 = $103.05 at the end of year 1 and an inflow of 100e0.04x2 = $108.33 at the end of year 2. Since 108.33= $103.05 e0.05 , a return equal to 5% is earned on $103.05 during the second year.
I understand the concept of forward rates but this doesn’t make sense to me because if he has returned $103.55 at the end of year one how can he earn a forward rate on money he no longer has. I hate problems like this because I spend hours aching to figure out what he is talking about hours better spent studying difficult stuff like the ugly Radon-Nikodym derivative.
Zero rate = 3.0
Year 2
Zero Rate = 4.0
Forward rate = 5.0
If an investor borrows £100 at 3% for 1 Year and then invests the money at 4% for 2 years the result is an outflow of 100e0.03x1 = $103.05 at the end of year 1 and an inflow of 100e0.04x2 = $108.33 at the end of year 2. Since 108.33= $103.05 e0.05 , a return equal to 5% is earned on $103.05 during the second year.
I understand the concept of forward rates but this doesn’t make sense to me because if he has returned $103.55 at the end of year one how can he earn a forward rate on money he no longer has. I hate problems like this because I spend hours aching to figure out what he is talking about hours better spent studying difficult stuff like the ugly Radon-Nikodym derivative.