Business Ethics Describe a spot rate and a forward rateSolut

Business Ethics

Describe a spot rate and a forward rate.

Spot Rates

Spot rate is the price quoted for immediate settlement on a commodity, a security or a currency. The

spot rate, also called “spot price,” is based on the value of an asset at the moment of the quote. This

value is in turn based on how much buyers are willing to pay and how much sellers are willing to

accept, which depends on factors such as current market value and expected future market value.

Forward Rates

The term forward rate is commonly used in both bond and currency trading to express today\'s

expectation of the future value of either a currency or a bond.

In bond trading the forward rate is an implied rate calculated from current interest rates on various

bond maturities. In theory, it would allow an investor to buy a five year Treasury bond and hold it to

maturity, or to buy a one year Treasury and hold it to maturity and repeat the process every year for

five years. In practice, it turns out that forward rates tend to be higher than the spot rate that ultimately

prevails.