Term Structure & Implied Forward Rates
Shape the spot (zero) curve and watch the no-arbitrage forward rates respond. An upward-sloping curve implies one-year forwards above the spot rates — these are the rates an FRA locks in.
Spot curve s_nImplied 1y forwards f(n−1,n)
Forward Rate Agreement — pick the period
The 1×3 forward rate f1,3 = 4.05% locks in borrowing or lending over years 1 to 3 (a 2-year period).
FRA f(1,3)
4.05%
Curve shape
Upward
1y spot
3.00%
5y spot
4.00%
1y
3.00%
spot = fwd
3.00%
2y
3.40%
f(1,2)
3.80%
3y
3.70%
f(2,3)
4.30%
4y
3.90%
f(3,4)
4.50%
5y
4.00%
f(4,5)
4.40%