FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations
A bond has a yield quoted at 6.00% per year on a semiannual-compounding (bond-equivalent) basis. What is its effective annual yield?
The effective annual yield is 6.09%. A 6% yield compounded semiannually earns 3% per half-year, and compounding twice gives 1.03 squared minus 1, or 6.09%. Reading it as 6.00% ignores intra-year compounding, and 6.18% reflects continuous compounding.
- A6.00%
- B6.09%Correct
- C6.18%
- D5.91%
Explanation
Effective annual yield = (1 + 0.06/2)^2 - 1 = 1.0609 - 1 = 6.09%. The 6.18% option is the continuous-compounding equivalent (e^0.06 - 1), which is not what the quote implies.
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