From Kaplan:
This isn’t the Effective Annual Rate formula. So they are judging this bond as its semi-annual yield, even though it is an annual?
First, it’s a poorly worded question.
When they say that its YTM is 7%, they don’t tell you whether that’s EAY, BEY, or something else. They want you to assume that it’s EAY (apparently), but there’s no reason that is has to be. (In the real world it would be BEY: everything’s quoted as BEY.)
The question they want to ask is this: When a yield is quoted as 7% EAY, will its BEY be greater than, equal to, or less than 7%?
The answer, as they explain, is less than.
I hate this kind of garbage.
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Excellent, your frank explanation provides valuable clarity!
