What will be 2 year forward rate starting at year-2 ? Is it 1K3 or 2K4? Here, K means yield on securities / bond. I´m so confuse. Can you explain it for me. 🙏
The 2-year forward rate in year 2 starts at the beginning of the year. So it is 1 plus the 3-year rate cubed divided by 1 plus the 1-year rate. Then you take the square root because there are two years and subtract 1. Y22 = (1.025^3/1.0256)^(1/2)-1