With a rising yield curve, the Forward curve is always higher than the Spot curve due to the “exposure premium”, correct?
In a sense, you can think of the spot rate as a sort of average of the forward rates (e.g., the 3-year spot rate is an average of the 1-year forward rate starting today, the 1-year forward rate starting one year from today, and the 1-year forward rate starting two years from today).
For a average to increase, the new value you add must be higher than the previous average (e.g., if you have 5 numbers whose average is 10, and when you add a sixth the average is 11, the sixth number must be greater than 11).
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Got it; and as you have explained prior about Forward rates’ uniqueness, “The difference is that it doesn’t discount that payment back to today; instead, it discounts it back one period (six months, generally).”
Side question. Could we not state that Forward rates are investors’ expectations of future rates?
There are lots of theories that try to explain the shape of the yield curve. Your question follows what’s known as Pure Expectations Theory.
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