Skip to content

FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

A bank quotes a nominal annual rate of 6% with semiannual compounding. What is the equivalent effective annual rate?

The effective annual rate is 6.09%. A 6% nominal rate compounded semiannually earns 3% per half-year, and compounding two periods gives 1.03 squared minus one, or 6.09%, which exceeds the 6% nominal rate because interest is earned on interest.

  1. A6.00%
  2. B6.09%Correct
  3. C6.14%
  4. D3.00%

Explanation

Effective annual rate = (1 + 0.06/2)^2 - 1 = 1.03^2 - 1 = 1.0609 - 1 = 6.09%. The 6.14% figure comes from wrongly compounding quarterly (1.015^4 - 1). The 6.00% figure ignores compounding altogether.

Did you get it right without looking?

One question tells you little. A timed set on Bond Yields and Return Calculations shows your real accuracy, how long you take and where you lose marks.

Practise Bond Yields and Return CalculationsFree diagnostic mock

More Bond Yields and Return Calculations questions