implied forward rates

implied forward rates
Indicated future interest rates derived from the differences between current rates for different maturities of the same instrument. Yield curves include implied information about future interest rates. For example, suppose that a 2-year investment offers a return of 6 percent while an otherwise identical 1-year investment offers a return of 5 percent. In this case, an investor who bought the 1-year investment and realized a return of 5 percent for the first year would have to be able to reinvest his money at 7 percent in the second year in order to get an average 2-year return of 6 percent. If the investor gets less than 7 percent in the second year, he will not do as well as the investor who purchased the 2-year investment. This implies that the rate for 1-year investments that will be available one year in the future will be 7 percent. American Banker Glossary

Financial and business terms. 2012.

Игры ⚽ Нужно решить контрольную?

Look at other dictionaries:

  • implied forward yield estimates — A forecast of future interest rates based on rates implied by futures prices. LIFFE …   Financial and business terms

  • term structure model — Also known as yield curve models. An assumption, or set of assumptions, used to describe future changes in interest rates over a range of maturities. The most simple term structure model is a parallel shift in rates, e.g. all rates rise by 1… …   Financial and business terms

  • Liquidity theory of the term structure — A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market s expectations of future interest rates because they embody a liquidity premium. The New York Times Financial Glossary …   Financial and business terms

  • expectations hypothesis — The theory that the shape of yield curves is determined by investors collective expectations of future interest rates. See implied forward rates. Also see liquidity preference for a modification of this interest rate theory. American Banker… …   Financial and business terms

  • liquidity preference — (1) A desire among some holders of financial instruments to keep some or all of their funds in liquid instruments, that is, instruments that either mature in a short period of time or that can be readily sold with small risk of loss. (2) A theory …   Financial and business terms

  • liquidity theory of the term structure — A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market s expectations of future interest rates because they embody a liquidity premium. Bloomberg Financial Dictionary …   Financial and business terms

  • Interest rate swap — An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party s stream of cash flows. Interest rate swaps can be used by hedgers to manage their fixed or floating assets and liabilities. They… …   Wikipedia

  • Constant maturity swap — A constant maturity swap, also known as a CMS, is a swap that allows the purchaser to fix the duration of received flows on a swap. The floating leg of an interest rate swap typically resets against a published index. The floating leg of a… …   Wikipedia

  • bootstrapping — For financial risk mangers, bootstrapping means (1) the procedure where coupon bonds are used to generate the set of zero coupon bond prices, or (2) the use of historical returns to create an empirical probability distribution for returns.… …   Financial and business terms

  • United States — a republic in the N Western Hemisphere comprising 48 conterminous states, the District of Columbia, and Alaska in North America, and Hawaii in the N Pacific. 267,954,767; conterminous United States, 3,022,387 sq. mi. (7,827,982 sq. km); with… …   Universalium

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”