1. What is a Forward Interest Rate?

Definition: The forward rate is the future interest rate implied by current interest rates for periods of time in the future.

Purpose: It helps investors and financial analysts understand market expectations of future interest rates and make informed investment decisions.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( f \) — Forward interest rate (decimal)
• \( r_{\text{long}} \) — Long-term interest rate (decimal)
• \( \text{long} \) — Long-term period (years)
• \( r_{\text{short}} \) — Short-term interest rate (decimal)
• \( \text{short} \) — Short-term period (years)

Explanation: The formula calculates the implied future rate between two time periods based on current spot rates.

3. Importance of Forward Rate Calculation

Details: Forward rates are essential for bond pricing, interest rate derivatives valuation, and understanding market expectations about future interest rate movements.

4. Using the Calculator

Tips: Enter the long-term rate (as decimal), long-term period (years), short-term rate (as decimal), and short-term period (years). The long-term period must be greater than the short-term period.

5. Frequently Asked Questions (FAQ)

Q1: Why do we need forward rates?
A: Forward rates help investors compare returns across different maturities and make decisions about future investments.

Q2: What's the difference between spot rate and forward rate?
A: Spot rate is the current interest rate, while forward rate is the future interest rate implied by current rates.

Q3: How do I convert percentage rates to decimals?
A: Divide the percentage by 100 (e.g., 5% = 0.05).

Q4: Can short-term period be zero?
A: No, the short-term period must be greater than zero and less than the long-term period.

Q5: What does a negative forward rate indicate?
A: Negative forward rates suggest market expectations of declining interest rates in the future.