Forward Rate Calculator
Calculate future interest rates using spot rates and term structures for bond valuation and investment planning
Calculate Forward Rate
Investment horizon for the longer-term investment
Current interest rate for the longer-term investment
Investment horizon for the shorter-term investment
Current interest rate for the shorter-term investment
Forward Rate Results
Example Calculation
US Corporate Bond Investment
Scenario: 5-year vs 3-year + 2-year reinvestment strategy
5-year bond rate (S₁): 6.0%
3-year bond rate (S₂): 3.0%
Time periods: n₁ = 5 years, n₂ = 3 years
Forward period: 5 - 3 = 2 years
Calculation
FR = ((1.06)⁵ / (1.03)³)^(1/(5-3)) - 1
FR = (1.3382 / 1.0927)^(1/2) - 1
FR = (1.2247)^0.5 - 1
FR = 10.66%
Forward Rate Applications
Bond Valuation
Estimate future coupon reinvestment rates
Risk Management
Hedge against reinvestment risk
Yield Curve Analysis
Understand term structure expectations
Investment Planning
Compare investment strategies
Key Concepts
Forward rates are implied by current spot rates
Used in efficient market arbitrage-free pricing
Essential for bond portfolio management
Help predict future interest rate movements
Understanding Forward Rates
What is a Forward Rate?
A forward rate is the interest rate of an investment that will be initiated in the future. It represents the market's expectation of future interest rates and is derived from current spot rates using the principle of no-arbitrage.
Why Calculate Forward Rates?
- •Evaluate different investment strategies
- •Hedge against reinvestment risk
- •Price forward rate agreements (FRAs)
- •Analyze yield curve implications
Forward Rate Formula
FR = ((1+S₁)^n₁ / (1+S₂)^n₂)^(1/(n₁-n₂)) - 1
- FR: Forward rate for the future period
- S₁: Spot rate for the longer time period
- S₂: Spot rate for the shorter time period
- n₁: Longer time period (years)
- n₂: Shorter time period (years)
Note: Forward rates assume perfect market efficiency and no transaction costs