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

A bond is purchased for 95 and sold six months later for 97 after receiving a semiannual coupon of 2.50 at the time of sale. Using the six-month holding-period return, what is the annualized return on a bond-equivalent (simple, times two) basis?

The annualized bond-equivalent return is 9.47%. The six-month gain is a USD 2 price increase plus a 2.50 coupon, totaling 4.50, which is 4.737% of the 95 purchase price. Doubling this six-month return gives 9.47% on a simple annual basis.

  1. A9.47%Correct
  2. B4.74%
  3. C9.70%
  4. D9.00%

Explanation

Six-month gain = (97 - 95) + 2.50 = 4.50. Six-month return = 4.50/95 = 4.737%. Bond-equivalent annualization multiplies by 2 = 9.47%. The 4.74% option is the unannualized six-month return. The 9.70% option effectively compounds the six-month return incorrectly, and 9.00% divides the coupon-adjusted gain by a different base.

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