FRM Part I · FRM Exam Part I · Interest Rates
A bond has a yield to maturity quoted as 6% per year with semiannual compounding. What is the equivalent effective annual yield?
The effective annual yield is 6.09%. A 6% yield compounded semiannually means 3% every six months, so growth over one year is 1.03 squared, which is 1.0609. Subtracting one gives 6.09%, higher than the 6% quoted rate.
- A5.91%
- B6.00%
- C6.09%Correct
- D6.14%
Explanation
Semiannual rate = 3%. Effective annual yield = 1.03^2 - 1 = 6.09%. The 5.91% option is the continuously compounded equivalent, 2 x ln(1.03). The 6.14% option wrongly assumes quarterly compounding.
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