Business Case Studies & Business Publications

Spot and Forward Interest Rates

Harris, Robert S.,...

Technical Note

Spot and Forward Interest Rates

Harris, Robert S.; Conroy, Robert M.

F-1520 | Published February 5, 2007 | 10 pages Technical Note

Collection: Darden School of Business

Product Details

This note examines how spot and forward interest rates relate to bond prices and to each other. After defining spot and forward rates, the note shows how to estimate spot rates from data on either zero-coupon bonds or coupon bonds. It also shows how to express these stated rates for different compounding assumptions. The note pays particular attention to understanding how arbitrage forces in markets establish the links between forward and spot rates and how to infer one set of rates from the other. The note deepens understanding of bond pricing, assuming that the reader is already familiar with the basics of present-value techniques. It is a useful springboard for topics (e.g., swaps) that require familiarity with spot and forward rates.