medium · Principles of Finance valuation
What is the relationship between the one-year spot rate (z₁), the two-year spot rate (z₂), and the one-year forward rate starting one year from now (f_1,2)?
- (1 + f_1,2)^2 = (1 + z_2) / (1 + z_1)
- f_1,2 = z_2 - z_1, a simple yield spread, not compounded
- (1 + z_2)^2 = (1 + z_1) × (1 + f_1,2)
- z_2 = (z_1 + f_1,2) / 2, a simple average of the two rates
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