In the response, the answer uses a 6-mo. rate and annualizes by 180/360…why aren’t they using the 1-yr rate and then annualizing by 180/360 Anyone?
b/c if we were only going to invest that $ for 6 months we couldn’t expect to get the 1yr rate which would normally be higher. i guess you’re supposed to always use the timeframe relevant to that calculation otherwise we’d be using 1yr libor for everything. here’s a question though…say for this problem the 3m rate was .4%, would we be discounting each dividend at its specific discount rate? what do you guys think? i guess technically it would make sense to do so but it’s just lame that i’ve never had to worry about more than 1 RFR whenever calculating any of these before?
I guess i just don’t understand why we are raising to the power of 180/360 when it is already a 6-mo rate? And yea, that is lame that every problem in the book uses one Risk free rate…
it’s the annuallized rate for the 3 mth, 6 mth and yearly rate…therefore you need to find the periodic rate to use in the question