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
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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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