CFA CFA Level 1 Question of the Week – Fixed Income

Question of the Week – Fixed Income

  • This topic has 5 replies, 3 voices, and was last updated Sep-17 by AdaptPrep.
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    • AdaptPrep
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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

    • fabian
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      C

    • vincentt
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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.

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

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

    • AdaptPrep
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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%

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