• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

Intrest Rate Calculation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Intrest Rate Calculation

  • This topic has 5 replies, 2 voices, and was last updated 7 months ago by LMR1006.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • November 13, 2024 at 8:03 pm #713219
    VikasK
    Participant
    • Topics: 98
    • Replies: 118
    • ☆☆☆

    Greetings Tutor. I hope you are doing well.
    Can you help me with the following

    A company is based in the US. The domestic short-term US$ interest
    rate is 3% per year.
    The equivalent rate in Euros is 6% per year. The current exchange rate
    is:
    0.94 Euros = $1

    Calculate the forward rate predicted by interest rate parity in (a) 6
    months

    Calculate the simple interest over 6 months:
    US$ = 3% × 6/12 = 1.5%,
    Euro = 6% × 6/12 = 3%
    Forward rate = 0.94 × 1.03/1.015 = 0.954 Euros/$.

    I’m okay with everything. All I want to know is why are we taking simple interest?
    Why aren’t we calculating the effective half yearly rate. The effective half-yearly rates are:For a 3% annual rate: 1.489%
    For a 6% annual rate: 2.956%

    November 13, 2024 at 11:08 pm #713223
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    In the context of calculating forward rates using interest rate parity, simple interest is often used for ease of calculation and clarity in understanding the relationship between the interest rates of the two currencies over a short period, such as 6 months.
    So….the use of simple interest allows for straightforward proportional calculations based on the annual rates divided by the number of periods.

    The effective half-yearly rates you mentioned (1.489% for 3% and 2.956% for 6%) could be used for more precise calculations, but they are not always necessary for basic forward rate calculations under interest rate parity. Keep things simple.

    November 14, 2024 at 2:08 am #713224
    VikasK
    Participant
    • Topics: 98
    • Replies: 118
    • ☆☆☆

    Thankyou Tutor.
    I have noticed that in certain part of syllabus (such as Working Capital Management) effective intrest rate are computed while in risk management they have used Simple Intrest.

    So is there any specific guidelines as to which one to use under which part of our syllabus

    November 14, 2024 at 7:38 am #713225
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    In Working Capital Management, effective interest rates are often computed to provide a more accurate representation of the cost of financing. This approach allows for a detailed analysis of cash flows and the overall financial health of a business.

    Whilst in risk management, particularly regarding interest rate risk, simple interest is typically used because it simplifies calculations and helps in understanding the basic concepts without the complexity of compounding.

    November 14, 2024 at 10:10 am #713229
    VikasK
    Participant
    • Topics: 98
    • Replies: 118
    • ☆☆☆

    Thank you Tutor 🙂

    November 15, 2024 at 12:47 am #713244
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    You are most welcome

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • adityachaudhry on Discounted cash flow techniques (part 3) – ACCA (AFM) lectures
  • nuripamir on ACCA Administrative Review
  • Jherddie on CIMA E3 Chapter 8 Test
  • umangkumbhat on What is Assurance? – ACCA Audit and Assurance (AA)
  • ahmadhoney on How to register with ACCA?

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in