Suppose I have an option free coupon paying bond which pays semiannually. Annual pay YTM is given as 6.9% and BEY is given as 6%. Which rate will I use in calculating the bond value?
I am not sure why my approach is wrong: I used 3% as I/Y on BAIIPlus.
Also, if in this same question Annual pay YTM is given as 6.9% and BEY is not given…
Then, why do we have to use 6.9/2 as the I/Y; Why shouldn’t I use effective semiannual rate…i.e.(sqroot(1+annual pay YTM)-1)? which comes to 3.39 %
Any help is appreciated. In dire need for a soln to this conundrum. I have been brainstorming for quite some time on this topic.
Calling something an “annual pay YTM” is just plain weird. Apparently they mean that it’s the EAY, which they should say. (Or, how about EAYTM: effective annual yield to maturity?)
In any case, I think it’s a typo: ii should be 6.09% (which equates to a BEY of 6%). The numbers they give you are inconsistent.
This sort of thing happens in third-party questions a lot more frequently than it should, and, as you can attest, it frustrates candidates no end. Take heart that on the real exam they’ll have checked and rechecked and rerechecked the numbers, so there won’t be these inconsistencies.
Use 3% as the semiannual (effective) rate and you’ll be fine. And check with the author of the question; they should have published an erratum on it.
So this means I’ll always go for ESAYTM when my compounding frequency is semi-annually? This makes more sense now So, in any bond question if compounding is done on a semi annual basis and EAY is given, one should first convert it to ESAY and then solve, right? That makes more sense.
So, in any bond question if compounding is done on a semi annual basis and EAY is given, one should first convert it to ESAY and then solve, right? That makes more sense.