In a 1x4 FRA, when discounting interest savings of $1,700 to the payoff at FRA expiration, can I use the BA II calculator to solve for it? Because when I use the calculator as N=90/360, I=6%, PMT=0, FV=1700, CPT–>PV; I got the result of PV=-1675.4152 But when I calculate it using the discount formula as 1700/1+(0.06*90/360) = 1674.88 I would like to ask if the diff is because of rounding or what else? Is it correct to type in N as 90/360? Coz I can’t remember the PV, FV formula and am totally dependent on TVM calculation in the calculator on the exam. I’d like to know if I can rely on the calculator for this. Thanks for any help!
rounding due to 0.06*(90/360) is not a exact 90-day rate. to be exact, you may use (1+x)^4=(1+6%), solve x, then use (1+x) to replace (1+0.06*90/360)
I don’t use the BA, but it is possible the calculator does it like this: 1700/(1+0.06)^90/360) instead of 1700/1+(0.06*90/360) where the latter is the correct way of doing it, per CFA books.
So basically, the calculator takes into account the compounding effect whereas per CFA books, for FRA we don’t need to, am I right?
i thought generally for LIBOR, you don’t take the compounding effect because its an add-on yield? Thats why you’ll frequently see in FRA’s and swaps that you can just take a fraction of the interest rate, without having to worry about the compounding implications?