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This video helped… ALOT. Currently a finance 5th year college student taking a multinational financial management class and this has been a topic i have been failing to grasp due to the language barrier with the professor. Thank you man. Subscribed
I'm in the CFA Level 1 curriculum now for the November exam - this explained it so much easier than the CFA lesson. You just got to the point instead of all the bullcrap that doesn't matter.
Thank you for that Dennis and goodluck with CFA Level 1! I've got a decent chunk of the L1 curriculum covered on my channel so you can likely find some more relevant videos in the future
I’m not taking these classes and I was interested too. 0 clue why it matters if the F2,3 is equivalent to earning __% compounded 3 times. Is it just coincidence or what? Too smart 4me.
Thank you for this video. I couldn't fully wrap my head around the relationship and mechanics of spot rates and the forward rate until you started explaining it at 5:55, but then it all made sense. Do you think you will make videos on option valuation as well?
I appreciate the feedback Dominik! Glad to hear it is starting to stick for you Dominique. I will absolutely make videos covering option valuation in the future. It is not a matter of "If", its a matter of "When" haha
I don't think there can be a spot rate for 0 because that means you would just lend money and receive it back instantaneously which doesn't make intuitive sense
Franco, based on the CFA textbooks you are correct! Some other textbooks use the terminology I used in this video. I made an updated version of this video with the terminology used in by the CFA here: ua-cam.com/video/ZOBeh-utLTE/v-deo.html
Suppose the 7-year spot interest rate is 9 percent and the 5-year spot rate is 6 percent. What is the implied forward rate on a 2-year bond originating 5 years from now. I wanna know how to approach this case
so if i want to lend someone money one year from now for 2 years that would be F1,3 and the calculation for that would be (1+S3)^3 = (1+S1)(1+S2)^2(1+F1,3) right? please correct me if I'm wrong
You're right that using the terminology I used in this video, you would call that F1,3 For that I would use this formula: (1+S3)^3 = (1+S1)*(1+F1,3)^2 That forward rate needs to be compounded twice as it is a 2 year forward
Augustus, imagine you have the 1 year forward rate for the first year and the second year. You could solve for the first formula I used in the video, but this time you'd need to solve for the left side and not the right side
Thanks, Ryan for the explanation, for me, it just does not make any sense to calculate the forward rates from spot rates, because such calculation will always produce a higher rate, which could postpone the investment decision. with the compounding effect, you will always end up with a higher rate and therefore, instead of lending today, you will prefer to lend next year. using forward rates in capital budgeting will certainly increase the hardel rate dramatically and might lead to a decision, not to accept a project!. mathematically, there is no problem for me, but the application of that concept is my concern.
My pleasure! This isnt necessarily true. Forward rates will generally be higher than spot rates with a consistently upward sloping yield curve, meaning spot rates expiring further in the future are higher than the more recently expiring spot rates. If this is not the case, and the yield curve is downward sloping, then some of the forward rates should actually be lower than some of the spot rates. It is possible you've only seen examples wihth upward sloping yield curves
@@RyanOConnellCFA I understand that at normal market conditions the yield curve will has upward slope, this is why I particularly spoke about the increase of future rate. Ofc if the yield curve has downward slope, we will have forward rates lower than spot rates. The only thing I am not able to digest is the application of the forward rates!
helpful visual but you are quoting your forward rates incorrectly. the correct way to quote a 1yr forward 2yrs from today (which you quote as F2,3) is actually F2,1
Hey Noah, it depends on the textbook your referencing. You have got the right format for the CFA Institutes books there. I've got another video with that way of quoting them here: ua-cam.com/video/ZOBeh-utLTE/v-deo.html
🔑 Join this channel to get access to perks & support my work: ua-cam.com/channels/Akyj2N9kd0HtKhCrejsYWQ.htmljoin
🎓 Tutor With Me: 1-On-1 Video Call Sessions Available
► Join me for personalized finance tutoring tailored to your goals: ryanoconnellfinance.com/finance-tutoring/
This video helped… ALOT. Currently a finance 5th year college student taking a multinational financial management class and this has been a topic i have been failing to grasp due to the language barrier with the professor. Thank you man. Subscribed
Thank you Chris! I'm glad the video was so helpful for you
Omg I couldn't figure out what was going on reading the textbooks... Your video is my savior. Thank you so much for making this video!
You're very welcome! Glad it helped Laura
I'm in the CFA Level 1 curriculum now for the November exam - this explained it so much easier than the CFA lesson. You just got to the point instead of all the bullcrap that doesn't matter.
Thank you for that Dennis and goodluck with CFA Level 1! I've got a decent chunk of the L1 curriculum covered on my channel so you can likely find some more relevant videos in the future
Hey, I am also registered for CFA level 1 nov attempt
It would be nice to connect with you
@@hatimbearingwala7189 Hey, feel free to reach out on LinkedIn
Hugely appreciate this got my level 2 exam in May and this was solid better than my instructor and I’m being serious legend
Thank you Alex, I really appreciate your feedback! Goodluck on the test and keep working hard 💪
I was studying about this and got so confused. Thank you for making it easy and simple. 🥰
My pleasure Shanky, it is easy to overcomplicate this! But realistically its a very simple topic
On my third attempt of CFA L1 and found this to be very helpful. Thank you
Best of luck with level 1 Jake! I'm glad you found it helpful
Have you cleared level 1?
@@tushartyagi9420 yup!
I skipped this class and was so freaking lost. Thanks brother!
Haha you're welcome my guy!
Really helpful, thanks!
Awesome, thank you for the feedback!
Thanks a lot. Much better explanation than my professor 🎉
It is my pleasure!
OH MY GOD!! Its that easy?!!!! Thank you so much!
Thank you! this was very helpful for CFA level 1 prep
You're very welcome!
You are a star
Thank you Benedict!
Goat
Thank you!
God bless u. I have fixed income exam tomorrow 🙏🏻
Best of luck with the test Anastasia!
Thank you for amazing explanation and making it easy... Short and sweet understandable session....
My pleasure Kanchana! Thanks for the feedback
Thank you, Ryan, very useful!👍
Glad it was helpful! 👍
Thanks Ryan. This was a great explanation!
Thank you! I'm glad it helped
Thank you for your valuable lecture so much, Ryan !!!😍
My pleasure!
Thankyou for making it simple
My pleasure 😊
Hi Ryanb... thank you so much for the video ..just wanted to understand the practicality in the real life scenario of forward rates
I’m not taking these classes and I was interested too. 0 clue why it matters if the F2,3 is equivalent to earning __% compounded 3 times. Is it just coincidence or what? Too smart 4me.
Very helpful to me, thank you for creating this video!
You're welcome Alona!
so simple and clear. thank you.
You're welcome! Its my pleasure
simple,easy and nice explaination
Thank you! And I love the Thor's hammer avatar you have
@@RyanOConnellCFA 😁😁
Thank a lot. You explain extremely clearly.
Glad it was helpful Nguyễn!
thank you!
You're welcome and thanks for watching!
Great help really ...thanks a lot 👍
Thank you for this video. I couldn't fully wrap my head around the relationship and mechanics of spot rates and the forward rate until you started explaining it at 5:55, but then it all made sense.
Do you think you will make videos on option valuation as well?
I appreciate the feedback Dominik! Glad to hear it is starting to stick for you Dominique. I will absolutely make videos covering option valuation in the future. It is not a matter of "If", its a matter of "When" haha
Great 👍
HI Ryan, wouldn't the forward rate that starts from 1 year for 1 year be denoted as F(1,1)?
Hey there, it depends on the syntax that you use! You would be correct for the CFA textbooks
Thankyou mate
Appreciate your work
Great explanation thank you!!!
Glad it was helpful!
thanks buddy
My pleasure!
Brilliant
Thanks!
Great video--thanks!
My pleasure Eric!
But what is swap curve then? It seems like I for years thought Spot rate curve was Swap curve.
Support great video! Thanks for the help!
Thanks for the positive feedback Gabriel!
Hi! how did you get 9.04% at 3.48 seconds. i am so confused lol pls help me!
Haha, where did you happen to get lost?
Wouldn't the fwd rate be f2,1 @ 1:31 (not f2,3)? thanks
It depends on the notation you use or the video you are looking at. For the CFA textbooks I think you are correct
God bless you, mate.
It is my pleasure John!
So can there be a spot rate at 0? Which is S0?
I don't think there can be a spot rate for 0 because that means you would just lend money and receive it back instantaneously which doesn't make intuitive sense
@@RyanOConnellCFA thank you!
@@minif4046 My pleasure!
Thank you sir
My pleasure Heshan
Thanks!
You bet!
i think you made a mistake in the example of foward rates at the beginning , the foward rate starting in t=2 and lasting 1 year is the 2y1y not 2y3y
Franco, based on the CFA textbooks you are correct! Some other textbooks use the terminology I used in this video. I made an updated version of this video with the terminology used in by the CFA here: ua-cam.com/video/ZOBeh-utLTE/v-deo.html
Thank You!
My pleasure!
it's really helpful.
Glad you found it helpful Omar!
Thanks a ton!
You're welcome!
Thank you
You're welcome!
how do we calculate f(1,3) in this case?
(1 + S3)^3 = (1+S1)*(1+ f(1,3))^2
1.08^3 = 1.05 * (1+ f(1,3))^2
1.2597 / 1.05 = (1+ f(1,3))^2
(1.1997)^(1/2) - 1 =f(1,3)
f(1,3) = 9.53%
Suppose the 7-year spot interest rate is 9 percent and the 5-year spot rate is 6 percent.
What is the implied forward rate on a 2-year bond originating 5 years from now.
I wanna know how to approach this case
This is an easy one my friend! See the formula below:
(1 + 0.09)^7 = (1 + 0.06)^5 * (1 + f)^2
Solve for f:
f = 31.01%
so if i want to lend someone money one year from now for 2 years that would be F1,3
and the calculation for that would be (1+S3)^3 = (1+S1)(1+S2)^2(1+F1,3) right?
please correct me if I'm wrong
You're right that using the terminology I used in this video, you would call that F1,3
For that I would use this formula:
(1+S3)^3 = (1+S1)*(1+F1,3)^2
That forward rate needs to be compounded twice as it is a 2 year forward
But how do you calculate a spot rate?
Augustus, imagine you have the 1 year forward rate for the first year and the second year. You could solve for the first formula I used in the video, but this time you'd need to solve for the left side and not the right side
Thanks, Ryan for the explanation, for me, it just does not make any sense to calculate the forward rates from spot rates, because such calculation will always produce a higher rate, which could postpone the investment decision. with the compounding effect, you will always end up with a higher rate and therefore, instead of lending today, you will prefer to lend next year. using forward rates in capital budgeting will certainly increase the hardel rate dramatically and might lead to a decision, not to accept a project!. mathematically, there is no problem for me, but the application of that concept is my concern.
My pleasure! This isnt necessarily true. Forward rates will generally be higher than spot rates with a consistently upward sloping yield curve, meaning spot rates expiring further in the future are higher than the more recently expiring spot rates. If this is not the case, and the yield curve is downward sloping, then some of the forward rates should actually be lower than some of the spot rates. It is possible you've only seen examples wihth upward sloping yield curves
@@RyanOConnellCFA I understand that at normal market conditions the yield curve will has upward slope, this is why I particularly spoke about the increase of future rate. Ofc if the yield curve has downward slope, we will have forward rates lower than spot rates. The only thing I am not able to digest is the application of the forward rates!
helpful visual but you are quoting your forward rates incorrectly. the correct way to quote a 1yr forward 2yrs from today (which you quote as F2,3) is actually F2,1
Hey Noah, it depends on the textbook your referencing. You have got the right format for the CFA Institutes books there. I've got another video with that way of quoting them here: ua-cam.com/video/ZOBeh-utLTE/v-deo.html
your forward notation is wrong...
It depends on what text you reference
🫡