FRM Part I · FRM Exam Part I · Interest Rates
A bond's yield is quoted at 6% with semiannual compounding. Which statement about its equivalent rate with annual compounding is correct?
The annual equivalent is 6.09%. Semiannual compounding at 3% per period gives 1.03 squared, or 1.0609, so the effective annual yield is 6.09%, above the 6% nominal quote.
- AIt is 6.09%, higher than the semiannual quoteCorrect
- BIt is 6.00%, since compounding frequency does not matter
- CIt is 5.91%, lower than the semiannual quote
- DIt is 6.18%, equal to the continuously compounded value
Explanation
Annual equivalent = 1.03^2 - 1 = 6.09%. Annual compounding for the same effective return requires a higher stated rate than semiannual, so 5.91% reverses direction.
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