CFA Practice Question

There are 490 practice questions for this study session.

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 7

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.
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