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The answer is 2.
Is the interest rate for a certain term
that begins in the future and ends later. So if a business wanted to
borrow money 1 year from now for a term of 2 years at a known interest
rate today, then a bank can guarantee that rate through the use a
forward rate contract using the forward rate as interest on the loan.
Forward rate contracts, which are a common type of derivative, are based
on forward rates. Forward rates are also necessary for evaluating bonds with embedded options.
The price of a bond is equal to the present value of all of its cash flows. The usual technique is to use a constant yield maturity (YTM) in calculating the present value of cash flow. However, the bond price equation can be used to calculate the forward rates as implied by the current market prices of different coupon bonds.Bond Price Calculated Using a Constant Yield to Maturity
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