Final answer:
A forward rate is an a. expectation of future interest rates based on current rates, used by investors to determine discount rates for valuing future payments. It includes the opportunity cost of capital and risk premiums.
Step-by-step explanation:
A forward rate is defined as an expected future interest rate implied by current interest rates. It is not the rate quoted today for immediate loans, nor is it an interest rate on a loan made today that will vary as market rates change. Furthermore, it's not an interest rate adjusted for anticipated inflation or an agreed-upon rate for a long-term loan initiated today. Instead, a forward rate is best understood as an indication of what the financial markets predict interest rates will be in the future, based on current rates. These are embedded in the yield curve and are inferred from the term structure of interest rates. Financial investors use forward rates in valuation of future payments to determine an appropriate discount rate, which reflects the opportunity cost of capital and potential risk premiums.
For example, if a financial investor decides that the appropriate interest rate to value future payments is 15%, this rate includes not just the base interest rate available in the market but also any additional risk premium the investor perceives—reflecting the potential risk that the investment may not yield the expected returns.