Annual-Pay YTM from semi-annual-pay-coupon-bond

CFA Level I
#1

What is the Annual-Pay Yield to Maturity of a 7% coupon semi-annual pay bond? What could the answer be? I thought riddles weren’t allowed in the exam :frowning: - Dinesh S

#2

I think 1071.225 may be the answer, what are the options???

#3

I suspect that this is one of those how do these things work questions. If two bonds are selling at par ceteris paribus which would you rather have annual pay, or semi-annual pay?

#4

Options below… A. 7.123% B. 8.096% C. 6.993% D. 6.334% - Dinesh S

#5

JoeyDVivre Wrote: ------------------------------------------------------- > I suspect that this is one of those how do these > things work questions. If two bonds are selling > at par ceteris paribus which would you rather have > annual pay, or semi-annual pay? I would prefer a semi-annual-pay bond? So what’s the conlusion? how would I conver the 7% semi-annual to annual yield? … I feel the answer should be less than 7% - Dinesh S

#6

A (1+0.07/2)^2-1 = 0.071225

#7

C (1+x/2)^2-1 = .07 x=6.9%

#8

answer is 1.035^2 - 1= 1.071225

#9

Maybe we need a bond price? Assume par, hmmm…

#10

sorry… Thats right… i was thinking about this all backwards… my bad

#11

ok guys, enough of guess-work. The correct ans is D 6.334% could you let me know how Schweser got to this answer? - Dinesh S

#12

They must have given you some more information. For get about annual pay and the question is “What is the Yield to Maturity of a 7% coupon semi-annual pay bond?” You need a bond price to answer this question and a maturity.

#13

just to clarify, the solutions shown by alpenchev and cpk123 would be correct if the question had asked us to convert a bond-equivalent yield (BEY) into an effective annual yield (EAY).

#14

So sorry, my bad!! I was looking at the wrong question and gave you the wrong options and answers. The correct answer is indeed (1 + 0.07/2)^2 - 1 = 0.0712 (as you all rightly pointed out). Could anyone explain me the intuition behind this formula? Why is the 7% being divided by 2, despite it’s already a semi-annual coupon rate and why did we raize it to 2? - Dinesh S

#15

the first 3.5 coupon is presumed to be re-invested at that same rate for the second semester.

#16

How is Annual-Pay Yield different than Bond-Equivalent-Yield? - Dinesh S

#17

If you have a bond paying 4% semiannually, its BEY is 8%.

#18

DarienHacker Wrote: ------------------------------------------------------- > If you have a bond paying 4% semiannually, its BEY > is 8%. So, going back to my initial question… “What is the Annual-Pay Yield to Maturity of a 7% coupon semi-annual pay bond?” Give data: Bond is a Semi-Annual Pay Bond, i.e. BEY = 7% and they have aksed for Annual-Pay-Yield, so should the answer be 2*BEY = 14%?? - Dinesh S

#19

if BEY is 7%, it pays 3.5% semiannually. equivalent annual yield is a bit over 7%, I think the exact number was previously posted on this thread.

#20

This is a messed up question - Darien is answering a non-messed up but different question. All we know about this bond is that it has 7% coupons and pays semi-annually. That means we know nothing about its ytm, bey, eay, etc…