Fin Maverick
Foundations VocabularyAccounting & ReportingEconomics & MacroQuant Methods & ProgrammingBusiness & Company AnalysisCorporate Finance & ValuationBehavioural Finance
Banking & Market InfrastructureFixed Income & RatesDerivatives & Structured ProductsPublic EquitiesTransactions & DealsPortfolio ConstructionFunds & AMCs
Private Markets & AlternativesRisk, Treasury & ControlAI & Digital FinanceStochastic Calculus & PricingWealth & Personal FinanceIndian Markets & RegulationProfessional Practice
CalculatorComparison
Frameworks
Explore Bootcamps
Equity ResearchPortfolio ManagementMutual Fund MasteryFinancial LiteracyInvestment Banking Analyst
Private Equity AnalystHedge Funds AnalystBreaking Into VCBreaking Into QuantsAI For Finance
Financial Analyst ProgramRisk Management ProgramPrivate Wealth ManagementDebt Capital MarketsDerivatives Foundation
Explore Internships
Equity Research InternMutual Fund Intern
Portfolio Management InternFinancial Literacy Intern
Explore Micro Courses

Equity Research6

Writing an Investment ThesisBuilding a Discounted Cash FlowReading an Annual Report FastReading a Sector Before a CompanySpotting Quality of Earnings Red FlagsBuilding a Revenue Forecast From Drivers

Portfolio Management3

Rebalancing: When, Why and What It CostsStrategic and Tactical Asset AllocationMeasuring Risk in a Portfolio

Mutual Fund Mastery3

Comparing Funds Without Being FooledHow a NAV Is Struck and Which Day You GetReading a Fund Factsheet Properly

Derivatives Unlocked4

Hedging a Real ExposureThe Greeks, PracticallyFutures, the Basis and What Moves ItReading an Option Payoff

AI For Finance2

Retrieval and Grounding for FinanceDocument Extraction in Finance

Breaking Into Quants4

Backtesting a StrategyHypothesis TestingCleaning Financial DataRegression for Finance

Breaking Into VC3

Sizing a MarketReading a Term Sheet as a FounderHow a Venture Round Actually Works

Financial Analyst Program4

Common Size and Trend AnalysisReading a Cash Flow StatementRatio Analysis That Says SomethingBuilding a Working Capital Schedule

Risk Management Program2

Credit Exposure and How It Is ReducedValue at Risk and What It Hides

Investment Banking Analyst3

Precedent Transactions and Why They DifferReading a Term Sheet StructurallyBuilding a Comparable Companies Table

Private Wealth Management3

Tax Aware Portfolio DecisionsBuilding a Client Risk ProfileGoal Based Planning Arithmetic

Debt Capital Markets3

Analysing an Issuer's CreditDuration and What It Does Not Tell YouBond Pricing and Yield Mechanics

Private Equity Analyst2

Fund Waterfalls and CarryThe LBO in Structure

Hedge Funds Analyst2

Short Selling MechanicsLong Short Mechanics
Courses
Explore Career Roadmaps
Investment Banking AnalystEquity Research AnalystVC AnalystPrivate Equity AnalystHedge Funds Analyst
Quant AnalystAI For FinanceFinancial Analyst ProgramPrivate Wealth ManagementDebt Capital Markets
Risk Management ProgramDerivatives FoundationPortfolio ManagementMutual Fund Mastery
PartnershipsShowdown
Log inSign up
Debt Capital Markets · CoreTrack
1Fixed Income, Credit & Rates
iBond Fundamentals
The BondBond Price and YieldPrincipalRedemptionFace Value, Par and PrincipalThe CouponThe IndentureThe IssuerMaturityFixed Income and Debt Securities
iiBond Pricing and Yield
What a Bond Yield…The Policy Rate and a Bond YieldCurrent Yield and Yield to MaturityYield to Maturity and Yield to CallThe Coupon and the YieldReinvestment RiskCarrySpread Return and Price Return
iiiInterest Rate Risk
Duration and ConvexityDuration and Convexity Calculator,…Key-Rate Duration vs Modified DurationThe Basis PointAccrued InterestRecovery RateSpot Rate and Forward RatePrepayment Risk and Extension RiskA Rate View and a Credit ViewInterest-Rate Risk and Reinvestment RiskHow to Analyse a…How to Review Prepayment…How to Analyse a…
ivRates Markets
The Term Structure of Interest RatesThe Yield CurveThe Forward RateThe Term PremiumParallel Shift vs Steepening…
vCurve and Carry Strategies
Curve StrategySteepener, Flattener and ButterflyHow to Read a…How to analyse a Yield-Curve ScenarioThe Butterfly TradeCarry and Roll-Down
viSovereign Bonds
Sovereign BondsPar Bond and Premium BondGovernment SecuritiesHow to Compare Government…Inflation-Linked BondsBond Total ReturnBond LadderHow to Read a Bond Term SheetHow to Map the…How to Analyse a…Treasury BillsTreasury Bill vs Sovereign BondThe Benchmark YieldThe Policy Rate and the Bond Market
viiCredit Risk
Credit RiskCredit Risk and Interest Rate RiskG-Spread, Z-Spread and Option-Adjusted…Credit SpreadTerm Premium and Credit SpreadHow to Build an…Rating ActionsDefault Rate, Loss Given…Expected Credit LossWhat a Credit Rating…A Rating Watchlist EntryThe Fallen AngelThe Credit CurveInvestment Grade and High YieldCollateral vs Guarantee
viiiCredit Analysis
Credit AnalysisCollateral, Guarantee and Credit…How to analyse a…Seniority and SubordinationCovenantsLeverage RatiosGross Leverage and Net Leverage
ixCredit Events and Recovery
Credit EventsCredit Event vs Liquidity EventHow to update Credit…The Distressed ExchangeThe Default NoticeCovenant Breach vs Restructuring EventHow to analyse Default…
xSecuritisation
SecuritisationOriginator, Servicer and Trustee…How to map a…Mortgage-Backed SecuritiesThe TrancheAsset-Backed SecuritiesAsset-Backed Security vs Mortgage-Backed SecurityCredit EnhancementPrepaymentThe Cash Flow WaterfallExtension RiskWeighted Average Life
xiFixed Income Portfolios
Ladder, Barbell and BulletFixed Income Portfolio MeasuresBarbell vs BulletHow to Map the…Tracking Error in Fixed Income
xiiFixed Income Research
Fixed Income ResearchFixed-Charge CoverageHow to assess Fixed-Income…How to Write a…The Four Assumptions That…A Liquidity Assumption and…The Spread ThesisStating Limitations in Fixed…

The Policy Rate and the Bond Market: How the Link Works

A policy rate is an administered rate an authority sets by decision, and it acts on the very shortest borrowing in a market rather than across a whole schedule of government rates. Horizons further out are settled by what lenders will take for waiting longer, so a move at the near end need not reach the far end evenly, or reach it at all.

What is a policy rate, and which parts of it belong to an authority?

Start with the kind of object a policy rate is. Most of what follows is settled by that one fact. A policy rateA rate an authority sets by decision rather than one that emerges from borrowers and lenders meeting. Its level, and the process behind it, belong to the authority that publishes them. is decided. Somebody sits down, deliberates and announces a number. A rate decided that way is an administered rateAny rate that is set by decision. The opposite is a rate that emerges from what borrowers and lenders actually agree. Every rate on the schedule below is that second kind., and an administered rate is a different creature from a rate that emerges when a borrower and a lender agree terms and money changes hands.

The difference is familiar outside finance. The rent a household pays its landlord emerges: two people bargained and settled on a figure, and if either had wanted more or less the figure would have moved. The fare printed on a bus ticket does not emerge. Somebody sets it, publishes it, and it stays where it was set until it is set again. Nobody bargains with the conductor. An administered rate is the bus fare and the schedule of government rates below is the rent, and confusing the two is the source of almost every wrong sentence written about this subject.

The level at which a policy rate is set, the process by which it is decided, the corridor of administered rates that surrounds it, how each of those is used, and the operations through which any of it reaches the money market are all set and published by the Reserve Bank of India at rbi.org.in, with its data site at dbie.rbi.org.in as the route to any series.

Each of those items moves. A printed level would be correct on the morning it was written and wrong from the afternoon it changed, and a reader who trusted the printed figure would carry a stale number into arithmetic that then looks fine and is not. Naming a thing and routing it survives the change; printing it does not. So each item is named and routed to the authority that sets it.

Try it out

The number is the thing a reader wants by now. Which level of the policy rate is stated?

Risk Management Program Bootcamp — Fin Maverick

Where on a schedule of government rates does an administered rate actually act?

On the shortest borrowing there is. Money lent for a night, or for a few days, has almost no alternative use in that window, so the administered rate available for exactly that stretch is close to the only rate in the room. The further out the horizon, the more alternatives a lender has and the less an administered rate is the whole story. The shortest horizons form the near endThe shortest horizons on a schedule of rates, where money is lent for very brief stretches and an administered rate is closest to being the only alternative. of the market, and contact happens there.

The record behind this walkthrough is narrow. The invented SPOT curve behind this material records six rates and six only: a one year SPOT rateThe rate for money placed today and returned at one stated future date. One rate for each date, and nothing said about the stretches in between. of 5.90 per cent a year, a two year SPOT rate of 6.25 per cent, a three year SPOT rate of 6.55 per cent, a five year SPOT rate of 6.90 per cent, a ten year SPOT rate of 7.35 per cent and a thirty year SPOT rate of 7.60 per cent.

The shortest horizon this record holds is one year, an administered rate acts on stretches far shorter, so the place where the two meet cannot be drawn on this schedule at all. That is worth sitting with rather than hurrying past. The most important part of the link, the exact place where a decision meets a market, lies off the left hand edge of everything this record holds. Saying so is more useful than sketching a plausible curve into the empty space and reading a number off it.

Six recorded horizons, and one row that has to stay empty Educational illustration. The SPOT curve is invented. Annual compounding, one discounting period a year. anything shorter than one year where an administered rate acts no rate here, and none estimated: this record simply does not carry one the one year SPOT rate 5.90 per cent a year the shortest horizon in the record the two year SPOT rate 6.25 per cent a year the three year SPOT rate 6.55 per cent a year the five year SPOT rate 6.90 per cent a year the ten year SPOT rate 7.35 per cent a year the thirty year SPOT rate 7.60 per cent a year the longest horizon in the record Seven rows drawn, six of them carrying a rate. The hatched row is the one the record does not fill.
Seven rows are drawn and only six carry a figure, because the stretch where a decision by an authority meets a market is shorter than the shortest horizon anybody recorded, so the meeting point has to be left hatched rather than sketched.

One convention belongs inside the arithmetic rather than in small print beneath it. Every rate in this guide is struck on annual compoundingOne discounting period a year. An amount due in three years is divided by one plus the three year rate, three times over., meaning one discounting period a year, so an amount due in three years at the three year SPOT rate of 6.55 per cent is divided by 1.0655 three times over. The convention is not housekeeping. The identical six numbers read on a semi annual convention would give different prices and a different set of derived rates entirely, and a reader who is not told which convention is running cannot reproduce a single line of what follows.

Try it out

Somebody asks for the exact place on this record where an administered rate touches the market. Where is it?

Why is the far end of the schedule not the near end moved along?

Because the two ends are not being charged for the same thing, and the record shows it plainly once division replaces subtraction. A raw subtraction between two recorded rates hides this. The gap from the one year SPOT rate to the two year SPOT rate is 0.35 percentage points and the gap from the ten year SPOT rate to the thirty year SPOT rate is 0.25 percentage points. The two gaps look like comparable quantities. The first gap covers one year of extra waiting and the second covers twenty, so the two are nothing of the kind.

Step one, what a step on the schedule costs per year of waiting
$$ k_{a,b} = \frac{s_{b} - s_{a}}{b - a} $$
ka,bthe step between two recorded horizons, in percentage points per extra year of waiting
sathe SPOT rate at the nearer recorded horizon, in per cent a year
sbthe SPOT rate at the further recorded horizon, in per cent a year
b - athe number of years the step actually spans, taken from the record and never assumed
What it says in wordsThe step between two recorded horizons, expressed per extra year of waiting, is the difference between their two SPOT rates divided by the number of years lying between them, which is the only way two steps of unequal length can be compared at all.

Run it across the whole schedule and the shape arrives. From the one year to the two year horizon the schedule charges 0.3500 percentage points for each extra year of waiting. From two to three years, 0.3000. From three to five, 0.1750. From five to ten, 0.0900. From ten to thirty, 0.0125. Divide the first by the last and the ratio is exactly 28. Nobody had to soften that comparison.

Recorded stepYears spannedDifference in pointsPoints per extra year
One year SPOT to two year SPOT10.350.3500
Two year SPOT to three year SPOT10.300.3000
Three year SPOT to five year SPOT20.350.1750
Five year SPOT to ten year SPOT50.450.0900
Ten year SPOT to thirty year SPOT200.250.0125
What one extra year of waiting costs, step by step Educational illustration. Percentage points per extra year of waiting, on the invented SPOT curve. one year to two years 0.3500 two years to three years 0.3000 three years to five years 0.1750 five years to ten years 0.0900 ten years to thirty years 0.0125 twenty years of extra waiting, priced at almost nothing per year 0.3500 against 0.0125: the first step charges exactly 28 times what the last one charges for each extra year.
Divided by the years each step actually spans, the near end charges 0.3500 percentage points and the far end 0.0125 for one more year of waiting, a ratio of exactly 28, so the two ends of one schedule are not the same kind of quantity at all.

The schedule does nearly all of its work in its first few years and almost none in its last twenty. Whatever is happening at the far endThe longest horizons on a schedule, where what is being priced is the willingness to wait a very long time rather than anything happening soon. is being decided by something other than pressure arriving from the near end. A household stall that charges a lot for the first hour of storage and almost nothing for the twentieth is the same shape: the first hour and the twentieth are priced by different considerations, and a change in the first hour rate says very little about the twentieth. The honest reading of the shape stops there. One schedule at one moment lets nobody go further.

Try it out

Per year of extra waiting, how much does this schedule add at its near end and at its far end?

Try it out

A schedule of rates forecasts nothing. Does today's schedule still say something definite about stretches of time that have not arrived yet?

Portfolio Management Bootcamp — Fin Maverick Futures, the Basis and What Moves It — free micro-course from Fin Maverick

What does today's schedule already fix about later stretches of time?

More than most readers expect, and none of it by opinion. Between any two recorded horizons there is a windowThe stretch of time lying between two recorded horizons. A rate priced for that stretch alone is what a FORWARD rate is., and that window already has a rate attached to it. Nobody has to be consulted to find it. The rate comes out of a division.

Start with what a SPOT rate does to money over its own horizon. One rupee placed at the one year SPOT rate of 5.90 per cent a year becomes 1.0590000000 after a year. Because 1.0625 is applied twice, one rupee placed at the two year SPOT rate of 6.25 per cent a year becomes 1.1289062500 after two years. The two totals are the growth factors, and the whole of what follows is one division between them.

Step two, what a SPOT rate does to one rupee over its own horizon
$$ G_{T} = \left(1 + \frac{s_{T}}{100}\right)^{T} $$
GTthe growth factor at horizon T, which is what one rupee becomes by then
sTthe SPOT rate at horizon T, in per cent a year, taken only from the six recorded values
Tthe horizon in whole years, and only the six the record carries
What it says in wordsThe growth factor at a recorded horizon is one plus that horizon's SPOT rate applied once for every year until the horizon arrives, which under annual compounding means one discounting period a year and nothing more frequent.

Now the division. Growing for two years is the same as growing for one year and then growing again for the second year alone. So the second year alone must supply exactly the amount by which the two year growth factor exceeds the one year growth factor, as a ratio. 1.1289062500 divided by 1.0590000000 is 1.0660115675. Subtract one and read it as a rate, and the second year alone is priced at 6.601157 per cent a year. Nobody was asked what they thought. Two recorded numbers were divided.

Step three, pulling the rate for a window out of two recorded SPOT rates
$$ f_{a,b} = \left(\frac{G_{b}}{G_{a}}\right)^{\frac{1}{b-a}} - 1 $$
fa,bthe FORWARD rate covering the window from year a to year b, per year
Gathe growth factor at the nearer recorded horizon
Gbthe growth factor at the further recorded horizon
b - athe length of the window in years, which sets which root is taken
What it says in wordsThe rate for a window between two recorded horizons is the larger growth factor divided by the smaller one, reduced to a rate per year by taking the root matching the window's length, so a FORWARD rate is a quotient of two figures the record already holds rather than a view about what is coming.

Do that for every window and the whole path appears. The FORWARD rateThe rate for money placed at one future date and returned at a later one. A FORWARD rate is already inside the SPOT curve rather than a separate opinion about the future. for the second year alone is 6.601157 per cent a year, from the one year SPOT rate of 5.90 per cent and the two year SPOT rate of 6.25 per cent. For the third year alone it is 7.152544 per cent a year, from the two year SPOT rate of 6.25 per cent and the three year SPOT rate of 6.55 per cent. Across the fourth and fifth years together it is 7.427157 per cent a year, from the three year SPOT rate of 6.55 per cent and the five year SPOT rate of 6.90 per cent. Across the sixth to tenth years it is 7.801894 per cent a year, from the five year SPOT rate of 6.90 per cent and the ten year SPOT rate of 7.35 per cent. And across the last twenty years it is 7.725218 per cent a year, from the ten year SPOT rate of 7.35 per cent and the thirty year SPOT rate of 7.60 per cent.

Five windows, five divisions, five rates nobody had to guess Educational illustration. Every input is one of the six recorded SPOT rates on the invented SPOT curve. the second year on its own 1.1289062500 over 1.0590000000, one year of growth 6.601157 per cent a year the third year on its own 1.2096517614 over 1.1289062500, one year of growth 7.152544 per cent a year the fourth and fifth years together 1.3960099896 over 1.2096517614, then the second root 7.427157 per cent a year the sixth to tenth years together 2.0324528891 over 1.3960099896, then the fifth root 7.801894 per cent a year the last twenty years together 9.0026038503 over 2.0324528891, then the twentieth root 7.725218 per cent a year Every left hand figure is a growth factor built from a recorded SPOT rate. No opinion enters any of the five lines.
Each of the five windows is settled by dividing one recorded growth factor by another and taking the root that matches the window's length, which is why a rate for a stretch of time nobody has lived through yet is arithmetic rather than a view.
Window between recorded horizonsDerived from these two SPOT ratesFORWARD rate a year
Second year alone5.90 and 6.25 per cent6.601157
Third year alone6.25 and 6.55 per cent7.152544
Fourth and fifth years6.55 and 6.90 per cent7.427157
Sixth to tenth years6.90 and 7.35 per cent7.801894
Last twenty years7.35 and 7.60 per cent7.725218
Futures, the Basis and What Moves It teaches you to price a future from spot and explain why the basis moves.

Does the derived path close back on the recorded schedule?

The derived path does close back. Five separate divisions could each be wrong in a way no single one of them reveals, so the check is worth running. Take one rupee. Grow it for a year at the one year SPOT rate of 5.90 per cent a year and it stands at 1.0590000000. Carry it through the second year at the derived 6.601157 per cent and it stands at 1.1289062500. Carry it through the third at 7.152544 per cent and it stands at 1.2096517614. Carry it through the fourth and fifth at 7.427157 per cent a year and it stands at 1.3960099896. Carry it through the sixth to tenth at 7.801894 per cent a year and it stands at 2.0324528891.

Now take one rupee again and do nothing clever with it: grow it for ten years at the ten year SPOT rate of 7.35 per cent a year and stop. The rupee stands at 2.0324528891. Two routes, one landing figure, digit for digit. Five separate derivations are one identity read five ways.

Step four, the identity the five derivations are five readings of
$$ G_{1} \times \prod_{(a,b)} \left(1 + f_{a,b}\right)^{\,b-a} = G_{10} $$
G1the growth factor at the one year horizon, 1.0590000000
fa,beach derived FORWARD rate, for the windows one to two, two to three, three to five and five to ten
b - athe length of each window in years, so each rate is applied for exactly as long as it covers
G10the growth factor at the ten year horizon, 2.0324528891
What it says in wordsGrowing one rupee at the one year SPOT rate and then through each derived window in turn must land on exactly what one rupee reaches at the ten year SPOT rate alone, because every growth factor in the middle appears once on top and once underneath and therefore cancels.
Two routes to the same landing figure Educational illustration. Bar length is what one rupee has become. Annual compounding, one discounting period a year. one rupee grown for a year at the one year SPOT rate of 5.90 per cent a year 1.0590000000 then the second year at the derived FORWARD rate of 6.601157 per cent a year 1.1289062500 then the third year at the derived FORWARD rate of 7.152544 per cent a year 1.2096517614 then two years at the derived FORWARD rate of 7.427157 per cent a year 1.3960099896 then five years at the derived FORWARD rate of 7.801894 per cent a year 2.0324528891 the one step route: ten years at the ten year SPOT rate of 7.35 per cent a year 2.0324528891 Change any one derived rate by a single basis point and the top route stops finishing on the dashed line.
The stepped route and the one step route finish on the same dashed line to the last recorded digit, which is the test that a set of separately derived window rates has to survive before any of them may be believed.
Try it out

Five FORWARD rates have been pulled out of six recorded SPOT rates. Which single check shows that not one of the five is wrong?

Why is a FORWARD rate not a forecast of an administered rate?

Two reasons, and they are independent. The second matters most, and survives even for a reader who has accepted the first and then quietly gone back to old habits.

The first reason is the one the arithmetic above has already made. A FORWARD rate is a quotient. The quotient came out of dividing one recorded growth factor by another and taking a root. Every FORWARD rate in this guide could be reconstructed by somebody who has never held a single view about the future, has never met an authority and does not know what a policy rate is. Nothing demonstrates more plainly that no opinion went into the figure.

The second reason is that the two figures are not even about the same object. A FORWARD rate here is a rate for government borrowing across a stated future stretch of time. An administered rate is a rate an authority sets, for a different purpose, on different borrowing, at the very short end. Different thing, different setter, different stretch. A correct answer to one question is not an answer to a different question, so even a perfect forecast of an administered rate would still not be a statement about a FORWARD rate for government borrowing.

Two rates, five questions, and not one shared answer Educational illustration. The FORWARD column is derived from the invented SPOT curve; the other column is named only. AN ADMINISTERED RATE A FORWARD RATE WHAT IT IS a rate arrived at by decision WHAT IT IS a rate for a stretch between two horizons WHO SETS IT an authority, named here and routed WHO SETS IT nobody: two recorded rates settle it WHOSE BORROWING short dated money market borrowing WHOSE BORROWING the government, over the stated window HOW IT IS OBTAINED read it from the authority that publishes it HOW IT IS OBTAINED divide two growth factors, take the root LEVEL SHOWN HERE none, and that is deliberate LEVEL SHOWN HERE 7.801894 for the sixth to tenth years
Read row by row the two rates disagree about what they are, who settles them, whose borrowing they price and how anybody gets hold of them, which is why one of them cannot be a prediction of the other.

The labelling rule earns its strictness on this subject. Every rate carries the word SPOT or the word FORWARD, and an administered rate is named as an administered rate and never given a level. The reason is arithmetic rather than pedantry. On this schedule the FORWARD rate for the second year alone works out at 6.601157 per cent a year, from the two year SPOT rate of 6.25 per cent and the one year SPOT rate of 5.90 per cent. The three year SPOT rate reads 6.55 per cent. The two figures sit 0.051157 percentage points apart, or 5.1157 basis pointsOne hundredth of a percentage point, so 170 basis points is 1.70 percentage points and 5.1157 basis points is 0.051157 percentage points..

Nothing should be moved to separate them. Rates for windows land near rates for horizons on any smooth schedule, and pulling the numbers apart to make a tidier table would make the schedule a fiction. The label does the work instead. Stripped of their labels, these figures let a careful reader merge two completely different objects without noticing, and no arithmetic anywhere will complain.

The error that gets made, and what it costs

A reader meets the FORWARD rate of 7.801894 per cent a year covering the sixth to tenth years, derived above from the five year SPOT rate of 6.90 per cent and the ten year SPOT rate of 7.35 per cent, and reads it as what the market expects the administered rate to be in five years' time. The misreading is the single most common one in this subject, and one correction is never enough. Wrong twice over, it lets readers who accept one correction keep the other half of the mistake.

Wrong the first time. A FORWARD rate is not an expectation of anything. The rate fell out of dividing 2.0324528891 by 1.3960099896 and taking the fifth root. Nobody was surveyed. Nobody held a view. The figure can be rebuilt by a reader with no opinion about the future whatsoever, and a quantity anybody can rebuild without an opinion cannot be carrying one.

Wrong the second time, and this is the half that survives the first correction. The two numbers are not about the same object. A rate for government borrowing across a five year stretch beginning in five years is one thing. A rate an authority sets, for another purpose, on short dated borrowing, is a different thing entirely. Grant the arithmetic every forecasting power it does not have and the reading still fails. The forecast would be of the wrong quantity.

The error is not carelessness, and who makes it is worth naming. Readers who have correctly learned that a FORWARD rate says something definite about later stretches of time then attach that something to the most familiar rate they know. The cost is arithmetic read as opinion. When the administered rate later settles somewhere else, that reader concludes the arithmetic was wrong, when in fact nothing was ever predicted.

The repair is the labelling rule: write SPOT or FORWARD beside every rate, name an administered rate as an administered rate, and show the two SPOT rates behind every FORWARD rate so it visibly looks like the quotient it is.

One sentence, two independent faults Educational illustration. The rate below is derived from two recorded SPOT rates on the invented SPOT curve. THE READING SOMEBODY MAKES The FORWARD rate of 7.801894 per cent a year is what the market expects the administered rate to be in five years' time. WRONG THE FIRST TIME It is not an expectation of anything. Divide 2.0324528891 by 1.3960099896, take the fifth root, and the figure appears. Nobody was asked for a view. WRONG THE SECOND TIME, AND THIS ONE SURVIVES THE FIRST CORRECTION It prices government borrowing across the sixth to tenth years. An administered rate is set for another purpose on other borrowing at the very short end.
Granting the arithmetic a forecasting power it does not have still leaves the reading broken, because the quantity being forecast would be government borrowing over a window rather than the rate an authority sets.
Try it out

Somebody reads the FORWARD rate of 7.801894 per cent a year as what the market expects the administered rate to be in five years. How many separate things are wrong with that reading?

Try it out

Why must every single rate carry the word SPOT or the word FORWARD?

Equity Research Bootcamp — Fin Maverick

Which claims about the link cannot be made from one schedule?

Three things, and each refusal is drawn as an empty cell with the reason written inside it rather than hedged in a sentence somewhere at the bottom. A refusal that hides is not a refusal.

One schedule does not say how much of a change at the near end reaches the far end. Answering that would need at least two schedules to compare, one before and one after, and this record holds a single schedule at a single moment. The schedule does not say the far end is independent of the near end either. Independence would be exactly as unsupported as the opposite claim, and it is the more tempting mistake. The arithmetic on the shape sounds like it is heading there. And no movement appears anywhere in this record, so nothing can be said about what happens to a holding when a schedule moves.

Three questions, three empty cells, three reasons Educational illustration. The record behind this guide holds one schedule at one moment and no movement in it. THE QUESTION ANSWER WHY THE CELL STAYS EMPTY How much of a change at the near end reaches the thirty year point? It needs at least two schedules to compare, and this record holds one. Is the far end simply independent of the near end, then? Claiming independence needs the same two schedules, so it is refused too. What happens to a holding when the schedule moves? There is no movement in the schedule anywhere in this record to describe.
Three questions a reader arrives with are answered with a hatched blank and a written reason, because a record holding one schedule at one moment cannot describe a schedule changing without inventing the change.

A reader can see the shape of what is missing and check that nothing was quietly filled in, so drawing a refusal as an empty cell with its reason inside is stronger than writing a careful sentence. One wording rule follows from the same discipline. A rate does not go up or down. Up and down mean the price in one sentence and the yield in the next, so a movement is a rise in the yield or a fall in the yield, every single time. Mixing them ends in saying the opposite of the arithmetic while nobody notices.

Try it out

An analyst is asked, in writing, how much of a change at the near end of this schedule reaches the thirty year point. Which answer belongs in that row?

Bond Pricing and Yield Mechanics — free micro-course from Fin Maverick

What can be said from one schedule, which is more than it looks?

Three things, each of them carried by arithmetic on the record rather than by assertion.

First, the far end of a schedule is a price for waiting a very long time, and per year of waiting it is charged at 0.0125 percentage points against 0.3500 at the near end. Two quantities that differ by a factor of 28 are not the same kind of number, whatever they look like sitting in adjacent rows of a table.

Second, every stretch of time between the recorded horizons already carries a rate, and each one falls out of today's recorded SPOT rates by division. So the schedule is not silent about later stretches of time even though nobody forecast anything. Arithmetic that predicts nothing says more than most readers expect.

Third, the thirty year SPOT rate of 7.60 per cent a year stands 1.70 percentage points above the one year SPOT rate of 5.90 per cent a year. In the other unit that distance is 170 basis points. A lender is charged the whole of it for waiting twenty nine years longer. Nobody decided the 170 basis points. A price is what emerges when people who want money and people who have it settle terms, and an administered rate is precisely not that.

The whole span, and what it is a price for Educational illustration. Both endpoints are recorded rates on the invented SPOT curve. Nothing between them is drawn. 5.50 6.00 6.50 7.00 7.50 8.00 per cent a year the thirty year SPOT rate, 7.60 per cent a year the one year SPOT rate, 5.90 per cent a year 1.70 percentage points, which is 170 basis points the charge for waiting twenty nine years longer spread evenly that is 0.0586 points a year, and no horizon here carries that rate The band is drawn between two recorded rates. The space inside it holds no rate this record carries. A price is what emerges when terms are settled; an administered rate is what somebody decides.
The two outermost recorded rates stand 170 basis points apart, and the band between them measures what a lender charges for waiting twenty nine years longer rather than anything an authority ever decided.
Try it out

The thirty year SPOT rate of 7.60 per cent a year stands 1.70 percentage points above the one year SPOT rate of 5.90 per cent a year. Who decided that distance?

How does anybody actually use a schedule like this?

A lending desk uses it as a discipline about where to look. Asked what a decision by an authority means for a thirty year government security, the disciplined answer starts by saying which part of the schedule the decision acts on and how far that is from the horizon being asked about. On this record those two places are separated by everything from a few days out to thirty years, and naming the distance is more useful than producing a confident number that no schedule supports.

An analyst uses it as a naming test on somebody else's work. Read any note about rates and rule two things: does every rate in it say SPOT or FORWARD, and is any figure being described as what the market expects an administered rate to be? On this schedule a window rate and a horizon rate sit 5.1157 basis points apart, so a note that fails the first test may have merged the two. A note that fails the second has turned a quotient into a prediction. Neither fault is visible in the arithmetic. The naming test earns its place for exactly that reason.

A household reading the news has the simplest use of the three. When a decision by an authority is announced and a headline says government borrowing costs will follow, the question worth asking is: over what horizon? The near end and the far end of one borrower's schedule are charged for different things at rates differing by a factor of 28 per year of waiting, so a sentence about rates that does not name a horizon has not said anything a reader can check.

Bond Pricing and Yield Mechanics teaches you to price a bond, move the yield, and explain the direction out loud without guessing.

Where does this schedule stop, and what is missing from it?

The record carries six horizons and nothing between them: one, two, three, five, ten and thirty years. There is no four year SPOT rate here. There is no nine year SPOT rate and no twenty nine year SPOT rate. And there is nothing at all shorter than a year. Each of those is a nodeA horizon at which a rate is actually recorded. Six of them exist here, and the space between two nodes holds no recorded rate. the record does not carry, and no line is drawn between the recorded points to read a value off.

The reason is reproducibility rather than fastidiousness. Filling a gap means choosing a method, and a straight line reading and a curved reading disagree. Two readings working from one record would then give two different numbers for the same object, and anybody checking one against the other would find a contradiction that neither reading created. So where a reader expects a rate in between, the answer is that the rate is not in this record, and it stops there.

The entire region where an administered rate acts lies shorter than the record's shortest node, so the sharpest consequence of that rule lands on this subject rather than any other. So the shape of the schedule is described from one year outwards, what that shape already fixes about later stretches is derived, and the near end where a decision actually lands is left undrawn, since drawing it would mean inventing every point on it.

One last thing worth saying before the routing, and it is the organising idea underneath everything above. The record does not hold six rates so much as one borrower at six different horizons. Nothing about the borrower changes between the one year point and the thirty year point: same promise, same payer, same everything. Only the lender's waiting time changes. So the shape of the schedule is read first, and any single level on it second.

The questionSettled where
The shape of the schedule, its per year steps and the whole derived FORWARD pathArithmetic on the record, from six recorded SPOT rates
What a policy rate is set at, and the process by which it is decidedThe Reserve Bank of India, rbi.org.in
The corridor of administered rates around a policy rate, and how each is usedThe Reserve Bank of India, rbi.org.in
The operations through which an administered rate reaches the money marketThe Reserve Bank of India, rbi.org.in
How a measured rate of change in prices is compiled and releasedThe Reserve Bank of India, with any series at dbie.rbi.org.in
How a benchmark government yield curve is constructed and publishedThe Clearing Corporation of India Limited, ccilindia.com

Every row above is either arithmetic on the record or the property of an authority, and nothing sits in between. The division is a useful test to carry away. Most confused writing about rates comes from a sentence that quietly moved a figure from the second kind of row into the first.

India

Where the rules and the published figures on all of this actually live

Every step above is free of any rule set except the compounding convention. A sum cannot be reproduced without the convention, so it sits inside the arithmetic. Each row below is named and routed to the authority that sets it.

  • What a policy rate is set at, and by what process it is decided. The Reserve Bank of India, rbi.org.in.
  • The corridor of administered rates around a policy rate, and how each of them is used. The Reserve Bank of India, rbi.org.in.
  • The operations through which an administered rate reaches the money market. The Reserve Bank of India, rbi.org.in.
  • How a measured rate of change in prices is compiled and released. The Reserve Bank of India, rbi.org.in, with any series at dbie.rbi.org.in.
  • Who may hold and deal in government securities, and under what conditions. The Reserve Bank of India, rbi.org.in.
  • How a benchmark government yield curve is constructed and published. The Clearing Corporation of India Limited, ccilindia.com.
  • Which security is treated as the reference at a given maturity, and how that is decided. The Clearing Corporation of India Limited, ccilindia.com, and the Reserve Bank of India, rbi.org.in.
  • What an issuer of debt other than the government must disclose, covered separately. The Securities and Exchange Board of India (SEBI), sebi.gov.in.
The level at which any policy rate is set, the process by which it is decided, the corridor of administered rates that surrounds it, how each of those is used, and the operations through which any of it reaches the money market are all named above and routed to the authority that sets them. What a measured rate of change in prices is or has been is covered separately. How a benchmark government yield curve is constructed and published, and who may hold and deal in government securities, are covered separately. How much of a change at the near end reaches the far end, and whether the far end is independent, cannot be settled from this record, because both need at least two schedules and this record holds one. What happens to any holding when a schedule moves cannot be settled either, because this record carries no movement. Where any rate is going cannot be settled from one schedule either. Why the government borrows and how much it borrows are covered separately. What a SPOT rate and a FORWARD rate are as objects, where a price comes from and how a yield is solved out of one are covered separately.
Debt Capital Markets Bootcamp — Fin Maverick

References

SourceNamed forWhere
The Reserve Bank of IndiaWhat a policy rate is set at and by what process, the corridor of administered rates around it and how each is used, the operations through which an administered rate reaches the money market, how a measured rate of change in prices is compiled and released, and who may hold and deal in government securitiesrbi.org.in
The Reserve Bank of India data siteThe route to any measured seriesdbie.rbi.org.in
The Clearing Corporation of India LimitedHow a benchmark government yield curve is constructed and published, and which security is treated as the reference at a given maturityccilindia.com
SEBIWhat an issuer of debt other than the government must disclose, named here and covered separatelysebi.gov.in

The six SPOT rates used throughout are invented.
Educational material. Not advice on any investment, tax, budget or market position.

← PreviousNext →
Fin Maverick Micro CoursesExplore Micro Courses
Fin Maverick BootcampsExplore Bootcamps
Fin Maverick

Finance education that ends in a job, not a certificate that gathers dust. Built for young India.

LEARN
CalculatorsFrameworksComparisonsCareersShowdown
RESOURCES
All CoursesMicro CoursesBootcampsInternships
COMPANY
AboutJob openingPartnership
LEGAL
Privacy PolicyTerms & ConditionsContent LicenseReturn & Refund Policy
© 2026 FIN MAVERICK / BUILT FOR INDIA.DO FINANCE, DO NOT JUST READ ABOUT IT.