# How to calculate the Transfer Pricing from the FTP curve?

According to some articles, Fund Transfer Pricing procedure is

1. setting the FTP curve.

First it's to select instruments and grid points, namely

• overnight to 1 week: rates from interbank money market deposit,
• 1 month to 1 year: LIBOR;
• 1 year to 7 years: Interest Rate Swap;
• 7 years above: government bond.

Then, by some interpolation, build up the curve

2. pricing the products matching term against the FTP curve

For example, if there's a non-amortizing \$100,000 loan of 2 years' tenor, and FTP curve at 24 months is quoting Interest Rate Swap of the same tenor as 3.5%, the loan's pricing is$ FTP = \$100,000 * 3.5\% = \$3,500 $. However, I've a questions here -- since FTP fundamentically means the marginal funding cost, when evaluating a loan, shall not the tenor be considered? It seems to me the FTP rate is sort of a Yield rate, it shall be compounded to calculate the funding cost:$ FTP = \$100,000 *(1- 1/(1 + 3.5\%)^2) = \$6,648.9 \$.

Am I correct, or there's some misunderstanding?

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How is the rate of 3.5% being quoted? As a simple interest rate, or as an annualized rate, and with what payment frequency? You cannot calculate it without knowing those details; 3.5% means nothing by itself. –  Phil H Mar 1 '13 at 10:45
@PhilH you are right, I forgot mention that the 3.5% is quoted from the IRS with the same tenor (24 month). –  athos Mar 2 '13 at 12:46
Still need more detail. 2y is the length of the swap, but not the frequency of coupon payments (annual is usual for USD), nor the day basis (actual/360 is usual for USD). Is that what you mean? Is this a vanilla market swap? –  Phil H Mar 4 '13 at 15:14
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