Calculating Forward Rates with Discount Factors: A Guide to Interest Rate Determination
Forward rate calculation using discount factors is a vital financial tool for assessing future interest rates. In simple terms, it involves using present values to predict future cash flows. Take, for example, a bank anticipating a customer’s loan repayment in one year. By employing discount factors, the bank can estimate the present value of the future payment, aiding in accurate assessment and risk management.