Business and Personal Finance Dictionary

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• IMPLIED FORWARD RATES
  
  Indicated future interest rates derived from the differences between current rates for different maturities of the same instrument. Yield curves include implied information about future interest rates. For example, suppose that a 2-year investment offers a return of 6 percent while an otherwise identical 1–year investment offers a return of 5 percent. In this case, an investor who bought the 1-year investment and realized a return of 5 percent for the first year would have to be able to reinvest his money at 7 percent in the second year in order to get an average 2-year return of 6 percent. If the investor gets less than 7 percent in the second year, he will not do as well as the investor who purchased the 2-year investment. This implies that the rate for 1-year investments that will be available one year in the future will be 7 percent.
  
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