FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations
A zero-coupon yield is quoted as 5.00% per year with continuous compounding. What is the equivalent rate compounded semiannually (quoted as an annual rate)?
The semiannually compounded equivalent is about 5.06%. Growth over six months is e to the 0.025, or 2.5315%, and doubling this for an annual quote gives 5.06%. The 5.13% figure is the effective annual yield, not the semiannual quote.
- A5.00%
- B5.06%Correct
- C5.13%
- D5.25%
Explanation
Semiannual rate per period = e^(0.05/2) - 1 = e^0.025 - 1 = 0.025315. Annualized quote = 2 x 0.025315 = 5.06%. 5.13% is the effective annual rate (e^0.05 - 1), which is a different quote basis.
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