CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
A semiannual-pay bond has a yield to maturity of 6.00% quoted on a semiannual bond basis. Restated as an annual percentage rate with quarterly compounding, the yield is closest to:
The quarterly-compounded annual rate is about 5.96%. Convert 6.00% semiannual to an effective annual rate of 6.09%, take the quarterly rate of 1.03 to the power 0.5 minus 1, which is 1.489%, and multiply by four. More frequent compounding requires a lower stated rate.
- A5.96%Correct
- B6.00%
- C6.09%
Explanation
The semiannual periodic rate is 3.00%, so the effective annual rate is 1.03^2 - 1 = 6.09%. Quarterly periodic rate = 1.03^0.5 - 1 = 1.4889%, and multiplying by 4 gives 5.96%. The 6.00% option ignores the change in compounding, and 6.09% is the effective annual rate, not a quarterly-compounded APR.
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