imported>Doug Williamson |
imported>Doug Williamson |
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| The rate of return in the market today for a notional or actual deposit or borrowing:
| | Trading between a buyer and a seller in which each uses the services of a different intermediary. |
| #Starting at a fixed future date; and
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| #Ending on a later fixed future date.
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| | There are four parties involved altogether, namely the buyer, the seller and the two intermediaries. |
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| <span style="color:#4B0082">'''Example'''</span>
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| The forward yield for the maturity 2-3 periods is 3% per period.
| | ==See also== |
| | *[[Three-corner model]] |
| | * [[Model]] |
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| This is the rate payable for period 3 only - a single period - which is pre-agreed today, 2 periods before the deposit or borrowing is contracted to change hands.
| | [[Category:The_business_context]] |
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| This means that a mutually binding agreement can be made today, for a deposit of £1,000,000 to be made at Time 2 periods into the future, which will return:
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| £1,000,000 x 1.03
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| = £1,030,000 at Time 3 periods.
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| A common application of forward yields is the pricing of forward rate agreements.
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| The forward yield is also known as the [[Forward rate]] or (sometimes) the Forward forward rate.
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| (The [[forward forward rate]] is technically slightly different.)
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| '''Conversion'''
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| If we know the forward yield, we can calculate both the [[zero coupon yield]] and the [[par yield]] for the same maturities and risk class.
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| The conversion process and calculation stems from the '[[no-arbitrage]]' relationship between the related yield curves.
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| This is illustrated on the page [[Converting from forward rates]].
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| == See also ==
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| * [[Yield curve]]
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| * [[Zero coupon yield]]
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| * [[Par yield]]
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| * [[Forward rate agreement]]
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| * [[Periodic yield]]
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| * [[Discount factor]]
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| * [[Coupon]]
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| * [[Flat yield curve]]
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| * [[Rising yield curve]]
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| * [[Falling yield curve]]
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| * [[Positive yield curve]]
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| * [[Negative yield curve]]
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| * [[Converting from forward rates]]
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