Question of the Week – Quantitative Methods

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%