The forward rate is the future yield on a bond. It is calculated using the yield curve

Yield curve

In finance, the yield curve is the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S...

. For example, the yield on a three-month Treasury bill six months from now is a forward rate.

Forward rate calculation

To extract the forward rate, one needs the term structure of interest rates. The general formula used to calculate the forward rate is:


Where we assume that all involved tenors are at most 1 year (short term rate or linear discount). Use actuarial form for long term rate(>1 year).

is the forward rate between term and term ,

is the time length between time 0 and term (in years),

is the time length between time 0 and term (in years),

is the interest rate for the period time 0 to term ,

is the interest rate for the period time 0 to term ,

Related instruments

• Forward rate agreement
  Forward rate agreement
  In finance, a forward rate agreement is a forward contract, an over-the-counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date. The contract will determine the rates to be used...
  
  
• Floating rate note
  Floating rate note
  Floating rate notes are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months, though counter...
  
  

A forward discount is when the forward rate of one currency relative to another currency is higher than the spot rate.

A forward premium is when the forward rate of one currency relative to another currency is lower than the spot rate.