# compounding rates

Hi all, I have a really silly question. I have come across various expressions for calculating rates/discount factors when t < 1 year. For example, Libor - 3%, to calculate a 3 Month rate => (1+ 3%) ^ (3/12) = 1.00742. however I have also come across expressions such as : (1+ 3% * 3/12) = 1.0075 I believe for continuous compounding the first expressions applies. But I have seen both expressions used when no continuous compounding is specifically mentioned. This is from the Scheweser notes. Any insights? Thanks!

For continuous compounding we would use :- e^3%*3/12 The first one you gave was normal compounding Second one is without compounding. Hope this helps.

thakurpratyush Wrote: ------------------------------------------------------- > The first one you gave was normal compounding > > Second one is without compounding. > > Hope this helps. When to use 1st one & when to use 2nd one ? Is there any tangible/clear rule ?

I think this is the rule: when it is LIBOR use this: (1+ 3% * 3/12) = 1.0075 when other Rf rate use (1+ 3%) ^ (3/12) = 1.00742