Derivatives- Schweser Self Test- Bk 5; Pg 326; Q #2

There may be a simple answer to this, but I am curious as to why they discount the two year rate back (1/(1.046^2)) rather than stick to how they have typically calculated swap rates (1/(1 + (0.046 * (720/360)))). Anyone?

this got me as well… what’s up with the 1.046&^-2?

i used the .046*2 and got .0451 as the answer… why is this incorrect? sorry BLOU, i just realized that i kind of went off on your post without adding ANY value, but this question bothered me as well.

its the formula for the 2 yr swap rate. you are confusing with an FRA?

Dsylexic- please see that swap readings/problems. For example, page 300 question 8: the 720 day present value (0.8772) is calculated as (1/(1 + (.07 * 2))) and not (1/(1.07^2)). Just looking for a little explanation for the inconsistency.

The difference is pretty small - 0.914 vs 0.916. Why isn’t it e^(-0.07*2) ?

Why do they switch it up though?

The interest stuff is confusing. 1) Lots of stuff is continuously compounded by its very nature. That means you use the the e- thing (that 2.71828 number). Alas, CFAI thinks that’s a calculus tthing which is not required. That leaves authors in a lurch looking for the right substitute. So they add confusion by choosing random things. 2) There are lots of conventions for how interest rates are quoted and sometimes those are useful and sometimes not.