Effective Annual Rate

pimp · June 5, 2008, 5:32pm

What’s the easiest way to calculate this?

ws1 · June 5, 2008, 5:35pm

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.

hala_madrid · June 5, 2008, 5:45pm

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

comp_sci_kid · June 5, 2008, 5:46pm

i actually do a shortcut and use option rate right away

hala_madrid · June 5, 2008, 5:50pm

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

pimp · June 5, 2008, 5:51pm

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

comp_sci_kid · June 5, 2008, 5:51pm

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

asdffdsa · June 5, 2008, 5:55pm

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

juve_fan · June 5, 2008, 5:56pm

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

comp_sci_kid · June 5, 2008, 5:58pm

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

turkish_dude · June 5, 2008, 6:11pm

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.

bigwilly · June 5, 2008, 6:22pm

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

hezagenius · June 5, 2008, 6:24pm

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

jwsmith6 · June 5, 2008, 6:25pm

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?

bigwilly · June 5, 2008, 6:29pm

nothing.

pimp · June 5, 2008, 6:31pm

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.

bigwilly · June 5, 2008, 6:35pm

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.

bigwilly · June 5, 2008, 6:36pm

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

tanyusha · June 5, 2008, 6:37pm

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

bigwilly · June 5, 2008, 6:41pm

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