Does anyone have a rule of thumb for the entire CFA Level II curriculum when it comes to compounding vs. simple interest?
For economics and anything LIBOR it seems like simple interest
For derivatives it seems like everything except for LIBOR is compounding
For fixed income it seems like everything is compounding
Please let me know your thoughts / if this is the wrong way to go about this… Thanks!
From the pricing of derivatives chapter, MRR (market reference rates like LIBOR, SOFR etc) are calculated using simple interest while all other rates are compounded (either discreetly or continuously).
Eg. A 90 day MRR of 5% would be 5% * 90/360 = 1.25%
where as calculating FV for 90 days based on annual risk free rate of 5% would require (1+0.05)^(90/365)
Also note that MRR work on 360 days while other rates work on 365 days.