Page 10 - PowerPoint Presentation

LOS 34.d: Describe the assumptions concerning the READING 34: THE TERM STRUCTURE AND
evolution of spot rates in relation to forward rates
implicit in active bond portfolio management. INTEREST RATE DYNAMICS
MODULE 34.2: SPOT AND FORWARD RATES, PART 2
RELATIONSHIPS BETWEEN SPOT
AND FORWARD RATES

For an upward-sloping spot curve, the forward rate rises
as j increases:
• the forward curve will be above the spot curve.

For a downward-sloping yield curve, the forward rate
declines as j increases:
• the forward curve will be below it.

Figure 34.1 shows spot and forward curves as of July
2013. Because the spot yield curve is upward sloping,
the forward curves lie above the spot curve.