If the 1-year rate is 4% and the 2-year rate is 4.5%, investing for two years must equal investing for one year and then at the forward rate for the second – about 5%. Forward rates reveal what the yield curve implies about future rates.
How to use the Forward Rate Calculator
- Time period 1
- Spot rate for period 1
- Time period 2
- Spot rate for period 2
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the first time period and its spot rate, and the second (longer) period and its spot rate.
Tips
- Use annualised volatility and interest rates as decimals per year.
- Remember that one standard option contract usually covers 100 shares.
- Options lose time value as expiry approaches – re-run the numbers as dates change.
- Derivatives can lose more than you expect; understand the maximum loss before trading.
Common mistakes to avoid
- Mixing days and years for time to expiry.
- Ignoring commissions and the bid–ask spread.
- Forgetting dividends when pricing options on dividend-paying stocks.
Inputs explained
| Field | What to enter |
|---|---|
| Time period 1 | In years |
| Spot rate for period 1 | In % |
| Time period 2 | In years |
| Spot rate for period 2 | In % |
What each result means
- Forward rate = (((1 + [Spot rate for period 2]÷100)^[Time period 2]÷(1 + [Spot rate for period 1]÷100)^[Time period 1])^(1÷([Time period 2] – [Time period 1])) – 1)×100
- Forward period length = [Time period 2] – [Time period 1]
Example values
How the main result changes when Time period 1 changes and everything else stays at the example values above:
| Time period 1 (years) | Forward rate (%) |
|---|---|
| 0.5 | 4.6672 |
| 0.75 | 4.8012 |
| 1 | 5.0024 |
| 1.25 | 5.3387 |
| 1.5 | 6.0145 |
Formula
Forward rate f = [(1 + S₂)^n₂ ÷ (1 + S₁)^n₁]^(1 ÷ (n₂ − n₁)) − 1Worked example
Inputs — Time period 1: 1 years; Spot rate for period 1: 4 %; Time period 2: 2 years; Spot rate for period 2: 4.5 %.
Results — Forward rate = 5.0024 %; Forward period length = 1 years.
Frequently asked questions
What is a forward rate?
An interest rate for a future period implied by today's spot rates.
How is it calculated?
From the ratio of compounded spot rates of two maturities.
Is the forward rate a forecast?
It reflects expectations plus a term premium, so it's not a pure forecast.
What formula does the Forward Rate Calculator use?
Forward rate f = [(1 + S₂)^n₂ ÷ (1 + S₁)^n₁]^(1 ÷ (n₂ − n₁)) − 1.