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illustration 30 at 12.17minute sir why are we multiplying 1st 3 month rate to next 3 month rate? we have add it right?
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Sriram Somayajula Admin
Interest rates are always multiplied/divided and not added/subtracted - explained this in security valuation bonds chapter - we derived forward rates using spot rates. pls check videos 28 & 29 in module on security valuation fixed income
Imagine you took a loan for 3 months and then extended it for another 3 months, you will have to pay interest on interest because of compounding effect
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