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sir can you further explain what is the difference between spot rate and forward rate ?
based on the question, it said receiving a variable amount based on the current yield curve rate. but in the answer, it received based on 1st year spot, remaining year is forward, why need use forward, what is difference between spot and forward,The current annual spot rates are the interest rate as of today depending on the length of the investment or borrowing. (So investing today for a year will give 2.5%, investing today for 2 years will give 3.1% per year, and so on.)
The forward rates are rates quoted today for investing or borrowing on a future date.
The wording of the question is a bit confusing, but when it ways that the variable amount received will be based on the ‘current yield curve rate’ is not not mean the current rate ‘today’ it means at whatever the current rate turns out to be on the date the payment is received, which is why we are using the forward rates (because we don’t know exactly what the rates will be on the future dates).
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