- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 5. Yield Measures for Fixed-Rate Bonds

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**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%

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**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 |