In the curriculum present value factor is calculated = 1/ (1+ r * days/360). It is ok for me if the period is less than 1 year (90 days, 180 days…) because I know the banks also calculate the interest like that. However, for the longer period, says 2 years (720 days), why don’t we calculate the present value factor = 1/(1+r)^2? The solution for the example 19 (in the image below) in the curriculum suggests PVF = 1/(1 + r * 720/360)
The interest rates on swaps are usually quoted as nominal rates (e.g., LIBOR), not effective rates.
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Thank you sir!
My pleasure.