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Hello John,
Could you please explain me why is there used forward rate for calculating receipts instead of current spot yield curve? I do not have any explanations in my text and it is different from fixed rate and floating rate exchange between companies where both gets some gain.
It is because the yield curve is giving the interest rates per year for different lengths of time. The rate per year is then fixed for the length of time.
We are trying to get the PV of the different interest receipts and so we need to know the rate for each separate year. The best we can do for that is to use the forward rates for each separate year.
Hope that makes sense 🙂
Then it means that :
Loan for 1 year has 2.5%
Loan for 2 years has 3.1%
Loan for 3 years has 3.5%
Loan for 4 years has 3.8%In this question we have 4 year bond where we pay 3.8% fixed amount every year (which we changed to 3.7625%). And then forward rates are like actual rates which give PV of interest in particular year?
Have all swap contracts zero value at the first year? Do we have a lecture on this topic?
From answer.
“The reason the equivalent fixed rate of 3·76¼% is less than the 3·8% four-year yield curve rate, is because the 3·8% rate
reflects the zero-coupon rate with only one payment made in year four. Here the bond pays coupons at different time periods
when the yield curve rates are lower. Therefore the fixed rate is lower.”Could you please show this comment with very simple sample?
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