CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Seabreeze Mortgage Securities has mortgage-backed securities outstanding that have a monthly cash flow yield of 0.325%. What is their annualized cash flow yield for semi-annual compounding?
A. 3.97%
B. 3.93%
C. 3.90%
Explanation: By convention, in the bond market monthly yield is compounded for six months and then annualized using the bond-equivalent method.

Six-month compounded yield = (1 + 0.00325)6 - 1 = 0.01966, or 1.966%, Annualized yield = 1.966 x 2 = 3.93%

User Contributed Comments 8

User Comment
danlan Should use semi annual and not not annual, i.e: use 6 instead of 12 to get B instead of A
steved333 but don't forget it compounds! don't take the easy monthly i X 12 way out of this one!!!
Criticull just assume everything related to fixed income is semi-annual unless otherwise stated, and you'll do better than i'm doing. Thank you :)
clarelau annualized yield=bond equivalent yield?

I calculate it this way (1+0.0035)^12-1=0.0397 but it just doubles the semiannual yield
showmethemoney good one
soukhov bond pays twice a year -> compounds begins twice
bond pays 12 times a year -> no compounds
bond pays 1 times a year -> compounds begins 1 time
ConnerVP1 By taking the monthly rate and compounding it six times, aren't they assuming monthly compounding and then multiplying by two?

why is it not:
(1+0.00325*6)^2

That is, you have six months of payments, and compound them twice a year.
nmech1984 Conversion rule:
(1+0.325%)^12=(1+x/2)^2
(1+0.325)^6=1+x/2
(1+0.325)^6-1=x/2
_____________
Annualized: x=2*x/2
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