I have two questions:
#1 A bank deposit for 100 days is quoted with an add-on yield of 1.5% based on a 360-day year. Calculate BEY and the yield on a semi-annual bond basis.
Add-on yield = (HPY) * (360/t) ; with yield = 1.5%; t=100;
HPY = 0.41667%
Now, I would get EAY from HPY.
1 + EAY = (1 + HPY)^(365/100)
EAY = 1.52925%
Now, I will get ESAY (Effective Semiannual yield):
ESAY = (1 + EAY)^½ – 1
Therefore, ESAY = 0.7616%
Therefore, BEY is 2* ESAY = 1.52344%.
My answers are not equal to the official answers, which are BEY = 1.5208% and the annual yield on a semi-annual bond basis = 1.5236%.
#2- I noticed one difference between how BEY is calculated in 2013 curriculum and in 2014 curriculum. For instance, 2013 curriculum, on page 494 of Book 5 calculates BEY exactly as above. However, 2014 curriculum, on page 427 Book 5, calculates BEY very differently. Curriculum 2014 states that the 90-day commercial paper discount rate of 5.76% quoted for a 360-day year converts to an add-on rate for a 365- day year of 5.925%. This converted rate is called a BEY, or sometimes just an “investment yield.” (I believe this merely does a linear conversion from a 360-day year to 365-day year. ) Moreover, there are tonnes of question in the curriculum that follow this concept. This is very different from what was in 2013 curriculum.
Any thoughts? I would really appreciate your help.
@watchtower alright so to answer your actual question, the first mistake that you are making is that we have to calculate bond equivalent yield which is based on a 365 days per yr basis. Here the rate is quoted for a bank deposit which is based on 360 days per yr.
So 1.5 × (365/360) = 1.5208%
Now calculate the add on yield for 100 days
1.5 × (100/360) = 0.4167%
Effective annual yield = 1.004167^(365/100) -1 = 1.5294%
Therefore, effective semiannual yield = 1.015294 ^ 1/2 -1 = 0.7618%
Bond equivalent yield = 0.7618% × 2 = 1.5236%
Hope this will clear the confusion. And about the curriculum change, personally I just stick to the latest 2014. So can’t help with that.
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