- This topic has 4 replies, 2 voices, and was last updated 6 years ago by
John Moffat.
John Moffat.-
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dumonde
- Topics: 28
- Replies: 58
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John,
Forgive me for this rather late question, and I can’t quite believe I’ve not noticed this until now but why do we divide the interest rates in the question into quarterly rates if they are already provided at 3 month equivalent rates.
For example:-
P is due to receive $5m in 3 months time
Spot $/£ 1.5384 – 1.5426
Current 3 month interest rates are:-
US Prime 5.2% – 5.8%
UK LIBOR 3.6% – 3.9%An obvious oversight on my part, not thinking that straight just now.
Thanks
dumonde
- Topics: 28
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Sorry, I meant to add….
I assume interest rates will always be quoted as annual rates hence the division into 3m, 6m etc, I just wanted to be sure.
If they were not quoted as annual rates how would the examiner quote them?
Thanks
John Moffat
- Topics: 57
- Replies: 50540
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They are always quoted as annual rates. (It is just that the annual rate the banks quote will differ depending how long the deposit/borrowing is for).
So if the US rate is 5.2% for 3 month deposits, it means that if you deposit for 3 months the rate is 5.2% per annum, and so the actual interest you will get for the 3 months is 3/12 x 5.2%.
(For 6 month deposits the bank might quote (say) 5.4% per annum, and so if you were depositing for 6 months the actual interest would be 6/12 x 5.4% )
dumonde
- Topics: 28
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Thanks John, I feel I confident about this section of the exam now.
John Moffat
- Topics: 57
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Great 🙂
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