I sometimes have an problem determining if the rate/yield provided in a Schweser question is the annual rate/yield or otherwise (so I don’t know if it’s good as is or if I have to adjust it). Does anyone else have this problem or know how I can approach these questions differently?
For instance (Schweser L1, B5, Pg 52): “Consider a 10-year, semiannual-pay 6% bond trading at 102 on January 1, 2014.”
I can sort of see how 6% is the annual rate because its quoted as a 6% bond, which pays semiannually, and apparently assuming quotes are annual is a safe assumption.
Another example (Schweser L1, B2, Pg. 238): The problem states that 5% is the 90-day riskfree rate for ABE and 3% is the 90-day risk free rate for DUB. We are asked to solve for the 90-day forward exchange rate. However, the solution divides the interest rates by 4 (indicating that they’re annual rates instead of 90-day rates).
I asked about this one directly and Schweser responded: “Whether it’s 30-day libor or 60-day or 90-day, they are all stated as annual rates, makes them easier to compare with each other.” I understand this, but these questions drive me crazy because my brain initially understands the situation as 'I need a 90-day rate, this says its a 90-day rate" when in reality its an annualized 90-day rate.
With both of these examples, I understand how I approached them and how the book approaches them, but I’m really hoping there’s a rule of thumb or something to indicate if they gave me the specified rate or the annualized rate. My friend, who’s taking level 3, says always assume it’s annualized. But I wanted a second opinion before I potentially threw away a few grand.
