Hi, I am confused between how to use correct method to get Present Value of a number. As you see as below, there are two methods to calculate the PV discount factor. Do you know what is the difference? ----------------------------- RFR= Risk Free Rate For example, T=20 days ; Annual RFR Rate=5% or 0.05 1) 1 + 0.05 (20/360) = 1.002778
Your #1 is simple interest (a discrete, day-by-day measurement), and your #2 is compound interest (althought I would guess you’d use 365 as the demoninator, unless it’s a t-bill). Honestly, sometimes you just have to know which to use in a given situation. I would hope if it’s not defined by a formula (like for bonds and t-bills), you are told simple, compound, or continuous.
Many thanks for your explanation!!!
I’m pretty sure we’re almost always using compound interest unless we’re specifically talking about the LIBOR, which our plain vanilla swaps are based on (hence using the simple interest)