According to some articles, Fund Transfer Pricing procedure is
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
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?