What Is a Forward Interest Rate?

A forward interest rate is the level of interest rates implicit in a given spot interest rate from one point in the future to another. After the yield curve is determined, all forward interest rates can be obtained from the spot interest rate on the yield curve, and the forward interest rate is closely linked to the yield curve. In modern financial analysis, forward interest rates are widely used. They can foretell market expectations of future interest rate trends and are a reference tool for central banks to formulate and implement monetary policies. Almost all interest rate derivatives in mature markets are priced by forward rates. ^[1]

Forward rate

To

Abandoned the discretionary right to a specific currency, commodity or other asset at a specific time in the future, and obtained an additional gain.

For example, a two-year time deposit is more than the total income obtained after a year's time limit expires and then withdraws the interest and deposits into the bank for one year.

This extra income is the forward rate. In turn, the cost of freely disposing of this fund after one year is this part of the income.

The difference between forward interest rate and spot interest rate:

The difference is that the starting point of the interest rate date is different, the starting point of the spot interest rate is at the current moment, and the starting point of the forward rate is at a certain moment in the future!