FRA Questions calculator, Because, interest, remember, discount

segalm

In a 1x4 FRA, when discounting interest savings of $1,700 to the payoff at FRA expiration, can I use the BA II calculator to solve for it?

Because when I use the calculator as N=90/360, I=6%, PMT=0, FV=1700, CPT-->PV; I got the result of PV=-1675.4152

But when I calculate it using the discount formula as 1700/1+(0.06*90/360) = 1674.88

I would like to ask if the diff is because of rounding or what else? Is it correct to type in N as 90/360? Coz I can't remember the PV, FV formula and am totally dependent on TVM calculation in the calculator on the exam. I'd like to know if I can rely on the calculator for this. Thanks for any help!

yalo

rounding due to 0.06*(90/360) is not a exact 90-day rate.

to be exact, you may use (1+x)^4=(1+6%), solve x,
then use (1+x) to replace (1+0.06*90/360)

random_walker47

I don't use the BA, but it is possible the calculator does it like this:

1700/(1+0.06)^90/360) instead of

1700/1+(0.06*90/360)

where the latter is the correct way of doing it, per CFA books.

xilinx_altera

So basically, the calculator takes into account the compounding effect whereas per CFA books, for FRA we don't need to, am I right?

ayaz_mahmud369

i thought generally for LIBOR, you don't take the compounding effect because its an add-on yield?

Thats why you'll frequently see in FRA's and swaps that you can just take a fraction of the interest rate, without having to worry about the compounding implications?