Hi everyone,
Long-time lurker, first time poster. This site has been very helpful. Thank you everyone.
I though I had figured out yields but I got a question wrong and I’m really confused:
Question: If the YTM on an annual-pay bond is 7.75%, what is the bond-equivalent yield (BEY)?
THe solution shows that BEY = 2*[1.0775^(0.5)-1] = 7.61%
Since this is an annual-pay, YTM should be equal to BEY right?
If it were semi-annual, then BEY = 2 * YTM and so on.
What am I missing here? Thanks in advance for your help.
BEY is twice the semiannual effective yield.
How often the bond pays coupons doesn’t matter.
The problem with the question is that “YTM” doesn’t specify a yield convention; i.e., you can have an effective annual YTM, a bond-equivalent YTM, a continuously compounded YTM, and so on. The author of the question was sloppy.
In short, it’s a lousy question.
Poor s2k, every other question I see him on is in response to some material made by a crappy author.
It keeps me off the streets.
Thanks for the quick reply. I also thought the question was badly worded.
So the semiannual effective yield (SEY) is the IRR that will set the PV of semiannual pay bond to its FV and
EAY or Annual-Pay YTM = [(1+SEY)^2]-1
and BEY = 2 * SEY
Ahah S2k, yea because outside of the finance guru life you’re a hoodrat right? hehe
Hey man I wont tell anyone, this isn’t a public forum or anything like that.
NJ_CFA
August 13, 2022, 9:00pm
#11
Searched for hours and came across this thread. THANK YOOU!!!