- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 44. Introduction to Fixed-Income Valuation
- Subject 5. Yield Measures for Fixed-Rate Bonds
CFA Practice Question
Consider a bond with coupons. The annual yield for semi-annual compounding is 5.84%. Which is most likely to be the quarterly yield if quarterly compounding is used?
A. 1.52%
B. 1.46%
C. 1.38%
Explanation: The quarterly yield x 4 should be less than 5.84%. Therefore, C is the only possible answer.
User Contributed Comments 8
| User | Comment |
|---|---|
| oac9 | Can someone arrive at the answer using the formula? |
| droko | yes. 1.38 x 4 = 5.52% < 5.84%. oac9: Why not? |
| dlinhai | 1.0584^0.25=1.014. Not sure how C is derived though? |
| littlecow | dlinhai: you cannot use 1.0584 directly as it is an annualized semi-annual rate. You need to convert it to an annual rate first. |
| pveace | Shall we use an equation 7 on page 417 of the curriculum? A general formula to convert an annual percentage rate for m periods per year, denoted APRm, to an annual percentage rate for n periods per year. But using so I got a slightly different answer = 1.45 |
| fobucina | I'm also getting pveace's answer. Initially, I converted APR into a per-period rate (APR/2) and subsequently compounded on a semi-annual basis to find EAR ([1 + APR/2]^2 - 1). I then found the per quarter rate by find the fourth root of 1 + EAR and subtracted the result by one. My answer was approx. 1.46%. Can someone tell me what I am assuming wrong? |
| nmech1984 | Using the EAR is ~1.43%. I don't get it at all. However, the comprehensive AN explanation is right. |
| Caliph | I do not think it is enough to state the answer and move on. Please always try to give a work-through of how the answer was derived. I used the APR formula and i am not getting what your answer is |