# Effective Annual Rate

What’s the easiest way to calculate this?

1. Figure out option cost (if you are borrow, subtract. if you are lender, add) 2. Compare market rate to strike rate, figure out options payoff. 3. Calculate loan CF using market rate. 4. Find out total CF (loan CF + option payoff) 5. Caculate your EAR. You decide if this is easy or not.

in 1, don´t forget to use the future value of the option premium

i actually do a shortcut and use option rate right away

comp_sci_kid Wrote: ------------------------------------------------------- > i actually do a shortcut and use option rate right > away don´t forget the spread

And what is this shortcut you speak of? comp_sci_kid Wrote: ------------------------------------------------------- > i actually do a shortcut and use option rate right > away

hala_madrid Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > i actually do a shortcut and use option rate > right > > away > > > don´t forget the spread yeah, chances are i will

do you think they will make us calc this? i know it cold, but i think that time could have been spent elsewhere lol.

comp_sci_kid Wrote: ------------------------------------------------------- > i actually do a shortcut and use option rate right > away good point this combines 3 and 4.

have to be careful with shortcut, i hope they are going to throw us an option that doesnt match the stupid loan

taking FV of the premium to find effective borrowing/lending amount is a bit too much detailed. it will have very very little impact on the rate. if the answer choices are not 0.0001 apart then you can ignore it. and I dont believe they will make us calculate the whole tidious thing for a 3 pointer.

Stalla stated that we wont have to calculate the Effective Annual Rate as its not in the LOS.

I could see this popping up in the morning somewhere. I don’t think it would be in the multiple choice session.

bigwilly Wrote: ------------------------------------------------------- > Stalla stated that we wont have to calculate the > Effective Annual Rate as its not in the LOS. so what would we need to calculate from this then?

nothing.

LOS 13, 39, b - Determine the effective annual rate for a given interest rate outcome when a borrower (lender) manages the risk of an anticipated loan using an interest rate call (put) option. Determine sounds like calculate to me… bigwilly Wrote: ------------------------------------------------------- > Stalla stated that we wont have to calculate the > Effective Annual Rate as its not in the LOS.

Sorry I misread their statement: Exam hint: Candidates are not requried to determine the effective interest rate for the floating rate laon. It is similar to an IRR calculation.

I was referring to 39.c and 39.d Damn. sorry about hte confusion

Yeah, I think we need to know how to calculate it.

Yeah its only for the Fixed one, not the floating rate loans. Thanks for bringing this up, i forgot about these.