1. What is Forward Interest Rate?

The forward interest rate is the future interest rate implied by current interest rates for different maturities. It represents the break-even rate that would equalize the total return between two investment strategies.

2. How Does the Calculator Work?

The calculator uses the forward rate formula:

Where:

• \( r_{long} \) — Long-term interest rate (decimal)
• \( long \) — Long-term period in years
• \( r_{short} \) — Short-term interest rate (decimal)
• \( short \) — Short-term period in years

Explanation: The formula calculates the implied interest rate between two future time periods based on current spot rates.

3. Importance of Forward Rates

Details: Forward rates are crucial for interest rate derivatives pricing, bond valuation, and financial planning. They help investors compare returns across different maturities.

4. Using the Calculator

Tips: Enter all rates in decimal form (e.g., 5% = 0.05). The long-term period must be greater than the short-term period. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between spot and forward rates?
A: Spot rates are current rates for immediate borrowing/lending, while forward rates are implied future rates between two future dates.

Q2: How are forward rates used in practice?
A: They're used to price forward rate agreements (FRAs), interest rate swaps, and to assess market expectations of future rate changes.

Q3: What does a higher forward rate indicate?
A: It suggests the market expects interest rates to rise in the future between the two specified time periods.

Q4: Can forward rates predict future interest rates?
A: They reflect market expectations but aren't perfect predictors as they don't account for risk premiums and other factors.

Q5: How does compounding affect forward rates?
A: The formula assumes annual compounding. Different compounding frequencies would require adjusting the calculation.