Does anybody have a good trick to memorize when we’re supposed to use a ratio (i.e. i x 90/360) vs an exponent (1+i)^.25-1 for discounting rates? It appears to me that the calculation is used interchangeably. Although, the result is quite close when used with large dollar amounts, the answer might vary due to rounding. For example, let i=4%. Ratio = 1%, exponent = 0.9853%.
I don’t have a good trick. I hard memorized it.
you use ratio for LIBOR and EURIBOR only. 360 days in a year, dun forget this too, for ratios only. for anything else you use exponents, and u have 365 days in a year.
Thank you, Passme. This will help.