Discounting - Which is technically correct?

CFA Level III Fixed Income
#1

I have a question on discounting that is best explained through an example:

Let’s say you are set to receive a payment of $100 in 60 days and the LIBOR rate is 1.2%.

Which is the technically correct way to discount this?

Option A)

100/((1.012)^(60/360))

Option B)

100/(1+.012*(60/360))

Now, these two formulas will both give very similar answers, I am just wondering which would technically be correct? I would think Option A because it accounts for the compounding fully, but want to be sure that this line of thinking is correct.

#2

LIBOR is a nominal rate, so B is correct.

If the rate were quoted as an effective rate, A would be correct.

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