Interest rate calculation

CFA Level II
#1

Hi All, Basic question on interest rate calculation. When given annualised LIBOR rates, you multiply by days/year to get to the rate used in your calculation. When discounting at risk free rate you dont multiply but ^ This seems to be the convention in the curriculum. Given small changes in results I would like to know when to multiply and when to ^ Appreciate your help. A

#2

  1. Add On yield multiply x n/360, according to CFAI applies on T-yields and yields based on LIBOR, EURIBOR, etc…

  2. Discount yield ^n/365 - use for all other calculation (stocks and index based yield, FX,etc.). There is only observation that for certain calculation as for example forward currency exch.rate based on countries’ IR, sometimes required discount and in same cases add-on yield.

I found in CFAI EOCs and portal tests, that is always mentioned which one to use, so I wouldn’t worry.

#3

Cheers makes sense. Appreciate it.

#4

No problem. I am glad to help…

#5

Generally the places where LIBOR and short term rates are used is where Simple interest applies. Like FRAs etc. That’s the convention. Rf rate is used in a compound interest manner since cash is deposited earning interest on principal and interest on interest etc.Rf rate is both a short and long term rate. LIBOR and its likes get exhausted after its time is over. Rf rates are assumed to be steady throughout (like a locked in rate)