RMontgomery

Well the techinical correct way to do it is to use compounding. For instance, if there is a 90 day rate = 5.0%, that number is annualized. To get the actual amount of interest paid, you raise it to the .25 = 1.23%.

However, with LIBOR rates, it is assumed 360 days are in a year. If you take the ratio of days/360, it will give you a real close approximation of the rate. In this case, 5.0%*(90/360) = 1.25%.

On the real thing, I would first use the technically correct way of compounding. If your answer isn't one of the listed choices, recalculate using the approximate measures.