0 Lubna ghazalBeginner Asked: March 24, 20232023-03-24T01:05:22+05:30 2023-03-24T01:05:22+05:30In: Fixed Income (CFA L2) how do we calculate the spot rates ? 0 Share Sorry, you do not have permission to answer to this question. 2 Answers Oldest Ishaan Kapoor The Official Nerd 2023-03-24T08:59:08+05:30Added an answer on March 24, 2023 at 8:59 am For calculating Year 3 spot rate we are given the discount factor for Year 3 So, 3 N 1 FV -0.8163 PV CPT I/Y = 6.99% Forward Rate is given as f(2,1) = 8.52%, using this we can calculate Forward Price (2,1) as 1 / 1.0852 = 0.9215 Formula for forward price is written as F(2,1) = P(3) / P(2) 0.9215 = 0.8163 / P(2) So, P(2) = 0.8858 This is the discounting factor for Year 2 2 N 1 FV -0.8858 PV CPT I/Y = 6.25% Lubna ghazal Beginner 2023-03-25T14:27:06+05:30Replied to answer on March 25, 2023 at 2:27 pm Thankyou very much, it is very helpful.
For calculating Year 3 spot rate we are given the discount factor for Year 3
So, 3 N 1 FV -0.8163 PV CPT I/Y = 6.99%
Forward Rate is given as f(2,1) = 8.52%, using this we can calculate Forward Price (2,1) as 1 / 1.0852 = 0.9215
Formula for forward price is written as F(2,1) = P(3) / P(2)
0.9215 = 0.8163 / P(2)
So, P(2) = 0.8858 This is the discounting factor for Year 2
2 N 1 FV -0.8858 PV CPT I/Y = 6.25%
Thankyou very much, it is very helpful.