CFA CFA Level 1 Question of the Week – Fixed Income

Question of the Week – Fixed Income

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      C

    • Avatar of AdaptPrepAdaptPrep
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        • Undecided
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        Great explanation, @vincentt‌!

        Another way to answer this question is to assign a coupon and face value to the security and compute all 3 yield metrics.

        Let’s say the security costs 100 and pays 110 (100 face and 10 coupon) in 6 months.

        The holding period yield would be:
        HPY = (P1 – P0 + D1) / P0 = (100 – 100 + 10) / 100 = 10%

        The bond-equivalent yield though is simply twice the semi-annual holding period yield, or 20%.

        The effective annual interest rate for this security would be the annualized holding period yield:
        r = (1 + 0.1)^2 – 1 = 21%

      • Avatar of vincenttvincentt
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          • CFA Level 3
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          Lowest: Holding period yield => it’s not annualised (otherwise would be the same as C).
          Mid: Bond-equivalent yield => multiply by 2.
          Highest: Effective annualised yield => power of 2.

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          Awesome explanation @vincentt, thanks! I wasn’t sure myself.

        • Avatar of vincenttvincentt
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            no prob at all @fabian‌ wasn’t sure if I’m supposed to explain the answer.

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