Final answer:
The statement that one-year forward rate curves are an indication of today's cost for future one-year money and that the actual cost may vary is true. This concept is implicated by the interest rate risk associated with bond pricing, which is based on the present value of expected future payments.
Step-by-step explanation:
The question pertains to the concept of forward rate curves and their predictive nature regarding future costs of money. The statement 'The one-year forward rate curve indicates today's cost of one-year money, at period X in the future; the actual cost at period 'X' will typically be either higher or lower than today's cost' is true. It highlights the essence that forward rates are indeed expectations or forecasts of future rates but do not guarantee those rates as factors like market interest rates and credit risk can change over time. Therefore, the price of a financial instrument like a bond is always the present value of a stream of future expected payments, which is influenced by the prevailing interest rate and the perceived riskiness of the investment.
For example, if you purchase a bond with a fixed interest rate and the market rates increase afterwards, new bonds may be issued at higher rates. This results in an opportunity cost, since you will be receiving smaller payments compared to the new, higher-yielding bonds. The present discounted value calculation helps to determine what an investor should be willing to pay now for future payments by factoring in the required interest rate.”