How to calculate the implied interest rate

What is the Implied Interest Rate?

The implied interest rate is the difference between the spot rate and the forward rate or futures rate on a transaction. When the spot rate is lower than the forward or futures rate, this implies that interest rates will increase in the future.

Implied Interest Rate Example

For example, if a forward rate is 7% and the spot rate is 5%, the difference of 2% is the implied interest rate. Or, if the futures contract price for a currency is 1.110 and the spot price is 1.050, the difference of 5.7% is the implied interest rate.

Imputed Interest Rate

A similar interest rate name with a different underlying concept is the imputed interest rate, which is an estimated interest rate used instead of the established interest rate associated with a debt, because the established rate does not accurately reflect the market rate of interest, or there is no established rate at all. This interest rate is most commonly used when a loan agreement contains either no interest rate or an extremely low one, and so must be adjusted back to a market rate before it can be recorded as an accounting transaction.

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