CFA CFA Level 1 Question of the Week – Fixed Income

# Question of the Week – Fixed Income

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• Undecided
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Quantitative Methods

For a 6-month security that pays a coupon and face value at maturity, which of the following yield metrics would be the highest? Assume yield is positive.

A. Bond-equivalent yield
B. Holding period yield
C. Effective annualized yield

• 4

C

Participant
• Undecided
3

Great explanation, @vincenttâ€Œ!

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%

• vincentt
Participant
• CFA Level 3
2

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.

• 2

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

• vincentt
Participant
• CFA Level 3
0

no prob at all @fabianâ€Œ wasn’t sure if I’m supposed to explain the answer.