Understanding Forward Rates in Fixed Income

In the context of fixed income securities, forward rates represent the future interest rates agreed upon today for a loan that will occur at a specified future date. Understanding forward rates is crucial for fixed income analysts and investors.

If the current yield on a one-year bond is 3% and the yield on a two-year bond is 4%, what is the one-year forward rate starting one year from now? This forward rate indicates the market's expectation of future interest rates.