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MaxMark_Ch08_Correct_Answers - MaxMarkViney MenuItem8(Topic...

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MaxMark—Viney MenuItem8:(Topic 8) Mathematics of finance: An Introduction to basic concepts and calculations Question 1: Some aspects of financial calculations are based on market conventions. For the purpose of simple interest calculations in the Australian market, what is the convention concerning the number of days in a year? A: 360 days per year B: 365.25 days per year C*: 365 days per year D: 365 days per year, except for leap years, when it is 366 . Feedback: The convention in the Australian market is to assume that there are 365 days in a year. If the period of an investment in a leap year includes 29 February, the 29th day is counted but the year is still assumed to have 365 days. MORE: Financial Institutions, Instruments and Markets 4/e 5/e , Section 8.2.1, p. 327 275 . In this example the amount was borrowed for 90 days, which must be converted into a fraction of a year in order to apply Equation (8.1). It is important to note that the market convention relating to the number of days in the year varies between countries; for example, in the United Kingdom, Australia and many other countries the convention is that a pa rate relates to a 365-day year. Though this practice is common, it is not universal. In the USA and in the euromarkets, the convention is to use a 360-day year. In this text the 365-day convention is used. In Example 3 the amount was borrowed for ninety days, which must be converted into a fraction of a year in order to apply Equation 8.1. It is important to note that the market convention relating to the number of days in the year varies between countries. In the United Kingdom, Australia and a number of other countries the convention is that a per annum rate relates to a 365-day year. However, in the United States and in the euromarkets the convention is to use a 360-day year. In this chapter the 365-day convention is used. Question 2: Some aspects of financial calculations are based on market conventions. For the purpose of simple interest calculations in the US and euromarkets, what is the convention concerning the number of days in a year? A*: 360 days per year B: 365.25 days per year C: 365 days per year D: 365 days per year, except for leap years when it is 366 . Feedback: In some markets, including the US and the euromarkets, it is conventional to assume that there are 360 days in a year. This simplifies calculations for securities with terms to maturity of 90, 180 and 270 days. MORE: Financial Institutions, Instruments and Markets 4/e 5/e , Section 8.2.1, p. 327 275 . In this example the amount was borrowed for 90 days, which must be converted into a fraction of a year in order to apply Equation (8.1). It is important to note that the market convention relating to the number of days in the year varies between countries; for example, in the United Kingdom, Australia and many other countries the convention is that a pa rate relates to a 365-day year.
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