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Question of the Week - Quantitative Methods

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited February 2016 in Level 1 Questions
For a 6-month security that pays a coupon and face value at maturity, which of the following yield metrics would be the highest? Assume yield is positive.

Question of the Week - Quantitative Methods 25 votes

Bond-equivalent yield
20%
riteshbadaialfredjcabrerasramanspabulumsOLUSEGUN 5 votes
Holding period yield
16%
Pahtsanmdlynch3muktajoetomlee 4 votes
Effective annualized yield
64%
hairyfairyAdaptPrepgoogs1484paulopitaBeregondduyhg99Baz_Djtk08001EpsixnaseemshaikhBlueJay3535dmuller27SwatiAlegriaavannoordsuls 16 votes

Comments

  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    Effective annualized yield

    Let's say the security costs 100 and pays 110 (100 face and 10 coupon) in 6 months.

     

    The holding period yield would be:

    HPY = (P1 – P0 + D1) / P0 = (100 - 100 + 10) / 100 = 10%

     

    The bond-equivalent yield though is simply twice the semi-annual holding period yield, or 20%.

     

    The effective annual interest rate for this security would be the annualized holding period yield:

    r = (1 + 0.1)^2 - 1 = 21%

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