A forward rate may be at a premium or discount compared to which rate?

A forward rate is derived based on the expected future interest rates and is compared to the spot rate, which is the current interest rate available for immediate transactions. When the forward rate is higher than the spot rate, it is considered a premium, indicating that future interest rates are expected to rise. Conversely, if the forward rate is lower than the spot rate, it signifies a discount, suggesting that future interest rates are anticipated to decline.

The spot rate reflects the actual market conditions at present, making it the most relevant benchmark for comparing forward rates. This comparison informs investors and financial professionals about market expectations and can influence their investment strategies and decisions. Understanding the relationship between the forward rate and the spot rate is crucial in debt and money markets, especially for pricing and valuing financial instruments like bonds and interest rate derivatives.