CFA Latest CFA Level 1 Discussions Question about calculating BEY/Semi-annual yield of Bonds

Question about calculating BEY/Semi-annual yield of Bonds

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    • watchtower
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      Hello All,
      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%.
      Any help?

      #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.

    • CFAcharterwannabe
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      @watchtower‌ ok i have a question. Why are you following the 2013 curriculum? There have been quite a few changes especially in the Fixed Income Securities section between then and now. Looking at both will just confuse you.

    • watchtower
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      Well, it doesn’t matter whether we use 2013 or 2014 curriculum. The definition of BEY shouldn’t change. The scope will change. My question is conceptual even though it refers or compares the two curriculum. I hope you are nto implying that curr. 2013 or 2014 is incorrect.

    • CFAcharterwannabe
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      @watchtower‌ i wasn’t referring to your question at all. And why would I even think of saying there are errors in the curriculum?!! I just meant there have been a few changes in the LOS’s between 2013 and ’14. So it would be better to stick to the latest curriculum i.e. 2014. That’s all.

    • watchtower
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      Ok! But it still doesn’t answer my question.

    • CFAcharterwannabe
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      @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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