EAY calculation

CFA Level I
#1

Bond is quoted with ytm of 4% on semiannual basis. What yields should be used to compare it with quarterly pay bond? I know we have to calculate EAY to compare, but how to calculate on quarterly basis with the given data ?

#2

  • semiannual convert to quarterly

  • (1+0,04)^1/2

  • then both yields, the comparable one and the yield of certain semmianual bond convert to annuized yield

by 4 times quarterly yield

  • compare yields on annual basis then
#3

Thank you, another related question is how to find EAY of a money market instrument ? For example 5% 100 day bill.

#4

find the HPY, then use MMY formula

HPY * 360/100

#5

With all due respect, you have things backward.

First, you calculate the HPY from the MMY, then you compute the BEY from the HPY.

I wrote an article on changing from one yield measure to another that may be of some help here: http://financialexamhelp123.com/comparing-yield-measures-quant/

#6

Thanks a lot, the article was very helpful. Plus there are some more articles on the website that will come handy. Thanks again.

#7

My pleasure.

#8

Giving YTM of 4% on a semi-annual basis, we can calculate the yield on a quarterly YTM as follows:

(1+4%/2)^2 = (1+r/4)^4

(1.02)^2 = (1+r/4)^4

(1.0404) = (1+r/4)^4

{(1.0404)^(1/4)} - 1 = r/4

1.00995 - 1 = r/4

0.00994 * 4 = r

r = 3.98%

So, a yield of 3.98% quaterly pay bond is equivalent to an effective yield of 4% semi-annual pay bond.