How is the 1-year forward rate (F1,1) related to spot rates S1 and S2?
Explanation
Forward rates bridge the compounding gap between short and long term spot rates.
Other questions
What is the face value of a bond?
How is the coupon rate of a bond defined?
What does the term Yield to Maturity (YTM) represent?
A bond has a face value of 1000, a coupon rate of 5 percent, and a YTM of 10 percent. How will this bond trade relative to its par value?
Calculate the value of a bond with a Face Value of 1000, a coupon rate of 10 percent paid annually, a maturity of 10 years, and a YTM of 10 percent.
A zero-coupon bond has a face value of 1000, a maturity of 10 years, and a YTM of 10 percent. What is its present value?
Calculate the value of a bond with a Face Value of 1000, 5 percent coupon paid semi-annually, 10 years to maturity, and a YTM of 10 percent.
A bond pays a 0 percent coupon semi-annually and matures in 10 years. If the YTM is 10 percent, what is the bond's value per 1000 face value?
What is the present value of a perpetual bond paying 50 annually with a discount rate of 10 percent?
In an amortization schedule for a level-payment loan, how is the principal repaid component calculated for a specific period?
A loan of 100 is repaid over 5 years with annual installments at an interest rate of 10 percent. What is the annual installment amount?
Using the amortization schedule for a 100 loan at 10 percent over 5 years (Installment = 26.38), what is the interest component in Year 1?
According to the Dividend Discount Model, what does the value of an equity share represent?
A stock is expected to pay a dividend of 10 next year. The expected return is 10 percent and dividends grow at 4 percent. What is the stock value?
A stock paid a dividend of 10 last year. The expected return is 10 percent and dividends grow at 4 percent. What is the stock value?
How is Terminal Value defined in the context of equity valuation?
A stock is trading at 100. It is expected to pay a dividend of 10 next year. The cost of equity is 15 percent. What is the implied growth rate?
A stock trading at 100 pays a dividend of 10 next year with a growth rate of 5 percent. What is the implied cost of equity?
How is the Trailing PE Ratio calculated?
A stock is trading at 100 and expected to earn 20 next year. What is its Leading PE ratio?
What is the formula for the Justified Leading PE Ratio derived from the Gordon Growth Model?
A company has a payout ratio of 40 percent, cost of equity (ke) of 10 percent, and growth (g) of 4 percent. What is the Justified Leading PE Ratio?
What does the Cash Flow Additivity Principle state?
If Investment 1 and Investment 2 produce the same Net Present Value (NPV), how should an investor choose between them based solely on NPV?
Calculate the one-year forward rate one year from now (1y1y) if the 1-year spot rate is 5 percent and the 2-year spot rate is 7 percent.
If a 1-year zero-coupon bond trades at 96 and a 2-year zero-coupon bond trades at 88 (Face Value 100), what is the 1-year implied forward rate 1 year from now?
What does Interest Rate Parity govern?
Spot exchange rate is INR 50 per USD. Interest rate in India is 8 percent and in US is 3 percent. What is the 1-year forward rate according to Interest Rate Parity?
Using continuous compounding, if Spot is 50, rate in India is 8 percent and US is 3 percent (both continuous), what is the 1-year forward rate?
What defines a call option?
A stock price is 100. In one year it can go to 150 or 90. A call option strikes at 120. What is the option payoff if the price goes to 150?
In the context of option pricing, how is the hedge ratio calculated?
Given: Stock Up=150, Stock Down=90, Option Up=30, Option Down=0. What is the hedge ratio?
Using a replicating portfolio where you buy 0.5 shares (at 100 each) and sell 1 call option. If the risk-free rate is 10 percent and the portfolio value at expiration is 45, what is the value of the call option today?
In the option pricing example, what is the Present Value of the replicating portfolio that yields 45 at expiry with a risk-free rate of 10 percent?
What is the relationship between bond price and market interest rate (YTM)?
Which bond trades at a premium?
If a bond's YTM is greater than its coupon rate, what must be true about its price?
What is the primary characteristic of a perpetual bond?
In a level-payment amortization schedule, what happens to the interest component over time?
Which valuation model is most appropriate for a company expected to pay constant dividends in perpetuity?
What is the formula for Value (V0) under the Gordon Growth Model?
Calculate the implied growth rate if Price = 50, Dividend next year = 2, and Cost of Equity = 8 percent.
If a stock's Payout Ratio increases, holding all else constant, what happens to the Justified Leading PE Ratio?
What does a Justified PE Ratio compare the actual market PE against?
If Spot = 100, Domestic Rate = 5 percent, Foreign Rate = 5 percent, what is the Forward Rate?
When calculating the value of a stock with different growth rates (multistage), what is the first step?
In the Cash Flow Additivity example, if Strategy 1 and Strategy 2 have the same NPV, which one should be selected?
If a bond trades at par, what is its YTM?