Discounting formula vexing me! (1+ r )^(n/360) OR (1 + r x n/360)

CFA Level II Equities
#1

Im used to discounting using this formula = (1+ r )^(n/360) instead of (1 + r x n/360). Generally im not bothered as the answers should be pretty close. However im beginning to notice huge differences when its comes to higher values of n, eg dealing with swaps etc. Is there any standard way of dealing this these - whether discounting forex, swaps, etc.

#2

Interest rate products = (1 + r x n/360)

Non interest rate products = (1+ r )^(n/360)

#3

Thanks Michelin. Could you clarify what you mean (by example) of non interest rate products???

#4

(1 + r x n/360): nominal rate; LIBOR and Eurobor are nominal rates.

(1+ r )^(n/360): effective rate; essentially everything else.

#5

Thanks Magician. However im not sorted yet. That was my earlier understanding but I have been working on swaps and swaptions. There are quotes on interests on the questions which do not say LIBOR nor Eurobor…and i have been using (1+ r )^(n/360) instead, unfortunately the answers use the other formula. Will it make any difference, from your experience if i apply the ^n/360 throughout???

#6

The differences will be negligeable.

However, the floating legs on swaps are generially LIBOR or Eurobor, a fact that CFA Institute expects you to know.