Implied forward rate

A forward interest rate that can be derived from the par or zero coupon yield curves. The expectations embedded in the yield curve indicate what the yields on varying maturities of fixed-income instrument should be. They also contain all the information needed to calculate, say, the one-year rate in one year´s time from the two-year rate and the one-year rate. The curve plotted by these rates, known as the implied forward curve, is steeper than the yield curve. That is, when the yield curve is positive, implied forward rates are higher than spot rates and in a negatively sloped curve implied forward rates are lower than spot rates. The implied forward curve is central to an understanding of derivative products as they are priced off it, rather than the spot rate even if they are struck with reference to the spot.