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Question of the Week - Quantitative Methods
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
Effective annualized yield
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Comments
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%