The question asks us to calculate the effective rate of borrowing. The solutions provided by CFAI (copied below) uses a 360/D convention. However, I thought when calculating effective rate, the convention we use is 365/D. Can anyone clarify? Thanks
Effective rate = [(CVA 120,000,000 + CVA 2,470,500)) / CVA 120,000,000]360/183 – 1.0 = 4.09%
Was the rate necessary to get full points?
I took the question as asking only what the dollar amount of interest is paid. I would’ve stopped there.
But to answer your question, I’ve seen them use 360 or 365 and give full points.
ive come across this multiple times. and the answer i think is… both.
legit: ive seen BOTH 365 and 360 as acceptable full credit answers. granted this was longer ago (think: pre 2013 or so CFAI). but i can assure you its there. full credit for either 365 or 360
The question said “calculate the effective interest paid”. But then in the answer guide it said effective interest can be calculated in currency units or effective rate. So I take it as either or would get you full points with the correct answer.
I didn’t see “rate” as part of the question, but since the solution showed it, it got me questioning if it should be 360 or 365. Thanks for confirming though!
The question says “and interest was calculated on an actual days/360-day basis” so that might be why.
The rate was not required. The question asked for interest paid.
I have seen past exams when both 360day and 365 day were acceptable, even if they said to use one or the other. That’s because the 360 is used to calcuating the payouts, but when finding effective rates you can use either.
In CVA.