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Choosing EURIBOR Zero Rates or Forward Rates for Loan Income Projections

Article Quant Q&A · Author: J.Gortari
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Summary

The document asks which EURIBOR rates to use when projecting future interest income on a bank’s loans: zero coupon rates or forward rates. The response recommends zero rates for this purpose, reasoning that they relate to investment over a period ending at maturity, which it compares to a loan whose payments come at the end. It contrasts this with forward rates, which it describes as calculated under a risk-neutral measure and mainly used in fixed-income option pricing.

The answer offers a brief conceptual distinction, not a worked projection or supporting market data. It does not specify the loans’ reset schedules, payment timing, amortization, spread, or how the quoted EURIBOR tenors map to loan cash flows. Those details can affect an income forecast, so the response alone does not establish a general rule that zero rates should be used for every loan projection.

Key ideas

  • The question concerns projecting bank loan interest income from EURIBOR curves.
  • The response recommends zero coupon rates for the stated projection purpose.
  • It characterizes forward rates as risk-neutral quantities used mainly in fixed-income option pricing.
  • The answer gives a conceptual rationale but no worked example or treatment of loan-specific cash flows.

Tags

Fixed incomeDerivatives pricing
Full text
# EURIBOR zero rates vs forward rates to project future income on a bank's loans


# EURIBOR zero rates vs forward rates to project future income on a bank's loans












I work at an international bank within the M&A FIG team, and have seen that my associate uses the future daily EURIBOR 3M,6M,12M to estimate what the future interest income on a banks loans will be. In order to do so, he got both the future daily Zero coupon rates and daily forward rates in the EURIBOR.

He then told me that the rate that has to be used to project the future interest income on a banks loans should be the zero rate, instead of the forward rate.

He didn't gave the reason for that (asked me to look it by myself), and cannot get any help from Bloomberg's specialists. It has been a week from that and I do not feel any progress in my research.

I would appreciate(a lot) any help on the matter. Thank you in advance.

Please

## Answer by numerairX (score 1)

https://quant.stackexchange.com/a/41926

I think one way to approach the answer is thinking what are these two rates used for. Starting with zero coupon rates, it's aiming for getting the par value back at maturity (similar to a bank's loan, where in the end payments are all up). For forward rates however, is calculated under the risk neutral measure and is mostly used for option pricing in fixed income. So in your case, your associate's goal is to calculate future interest income, hence zero coupon rates is a good measure for the interest.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.