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Foundations of CFE Exam Old Financial Economic Theory Forum 
View Poll Results: How do you do discounting when it's not specified in the question?  
Continuous discounting: S * exp(r%*t/12)  8  61.54%  
Effective annual rate: S / (1+r%)^(t/12)  3  23.08%  
Annual percentage rate: S / (1+r%*t/12)  0  0%  
Others: Please specify  2  15.38%  
Multiple Choice Poll. Voters: 13. You may not vote on this poll 

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#1




General question on how do you do discounting?
When you are given interest rate = r% p.a. and the question does not specify how discounting should be done. Which approach would you use?
While it's intuitive for some models (e.g. continuous discounting as a part of BlackScholes formula), let's assume something in a more general context, like bond coupons and binomial trees. Last edited by ASstudent; 04232012 at 02:11 PM.. 
#2




I always use continuous, only because I was in the habit of using annual effective rate method, and would make some silly mistakes (like forgetting that the time steps in a binomial tree were x months instead of 1 year, and dividing by 1.05 instead of (1.05^(x/12)).
Using continuous kind of forces that t in my face and helps me remember not to make this stupid mistake. 
#3




My impression is that if the question does not state what form they are in then we should just state our assumption and move on with the calculation.

#4




If the question does not specify, either approach is fine.
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discounting, interest rate 
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