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Hi,
I’ve got a quick question regarding chapter 23, example 7, in the Opentuition notes.
In the question, it states what the current 3-month interest rates are. However, in the answer it multiplies these interest rates by 3/12. I thought that if they were 3-month interest rates already then they wouldn’t need prorating. Am I right?
Also, just to let you know there’s a slight misprint in the answer. On the top line, it should say “1.016” instead of “1.0116”.
Thanks for your help.
Unless you are told otherwise, interest rates are always quoted as yearly interest rates (as happens in practice).
Banks give different annual rates of interest depending on the length of the borrowing (or depositing).
So a 3 month interest rate of (for example) of 10%, means that they will pay interest at the rate of 10% p.a. for three months.
If, however, you were going to borrow or deposit for 6 months, they might quote 12% p.a.
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