CFA CFA Level 1 Question of the Week – Quantitative Methods

Question of the Week – Quantitative Methods

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    • AdaptPrep
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      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.

      • Bond-equivalent yield
      • Holding period yield
      • Effective annualized yield
    • AdaptPrep
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      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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