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Hi
The cost of capital is usually and always treated as yearly rate to discount the cash flows at the end of the year but if we need to calculate the PV of cash flows on monthly basis using the same yearly cost of capital then how we convert it into monthly rate? is it simply dividing the rate by 12 or is there an other technique?
Thanks
If r is the monthly rate and R is the yearly rate, then
(1+r)^12 = 1+R
However, this is revision of Paper MA (was F2) and you can find free Paper MA lectures on interest on this website. You are not asked to discount on a monthly basis in Paper FM.
The free Paper FM lectures are a complete free course and cover everything needed to be able to pass the exam well.
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