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

A bond has a stated yield of 6.00% per year compounded semiannually. What is the equivalent effective annual yield?

The effective annual yield is 6.09%. A 6% yield compounded semiannually earns 3% every six months, and compounding that twice gives 1.03 squared minus one, or 6.09%. Quoting 6.00% ignores the interest earned on the first coupon during the year.

  1. A6.00%
  2. B6.09%Correct
  3. C6.15%
  4. D6.36%

Explanation

Semiannual rate is 6.00%/2 = 3.00%. Effective annual yield = (1.03)^2 - 1 = 1.0609 - 1 = 6.09%. Choosing 6.00% ignores compounding within the year.

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