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Hi John,
Why is the annual interest receivable based on spot rate for Year 1 but for year 2,3,4 on forward rates?
Why isn’t the year 2,3,4 rates for int receivable the current annual spot yield curve rate as given? 3.1,3.5,3.8?
I appreciate your time, thank you.
The wording of the question is a bit confusing.
The spot rates are the rates quoted ‘now’ for various lengths of periods.
What we need to know is what the spot rates will be in 1 years time, in 2 years time, etc..
Since they are not given directly, we have to assume they will be equal to the current forward rates.
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