Investments, tenth edition

 Example  15.4 

Forward Rates 

  We emphasize again that the interest rate that actually will prevail in the future need 

not equal the forward rate, which is calculated from today’s data. Indeed, it is not even 

necessarily the case that the forward rate 

equals the expected value of the future 

short interest rate. This is an issue that we 

address in the next section. For now, how-

ever, we note that forward rates equal future 

short rates in the  special case  of interest rate 

certainty. 

 

    

 You’ve been exposed to many “rates” in the last few pages. 

Explain the differences between spot rates, short rates, and 

forward rates. 

 CONCEPT CHECK 

15.4 

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7/17/13   4:03 PM

7/17/13   4:03 PM

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