Hi everyone,
I am strugling with a question taken from the Schweser Qbank:
Company XYZ issues a 73-day commercial paper that will pay 1004 USD at maturity per 1000 USD face value. The bond-equivalent yield is closest to:
(Solution from Schweser): the AOY for the 73-day holding period is 1004usd/1000usd -1 = 0.04%. The BEY, which is an AOY based on a 365-day year, is (365/73)x0.4%=2.0%
Ok so first, I wouldn’ have used this formula as I am (was?) not familiar with the “accelarated” formula BEY (for on AOR), BEY=(365/t)xAOY
I resolved it this way (it’s false, of course…):
Formula of BEY: (365/d) x ((FV-PV)/PV))
As I already know the PV (1000 USD), I want to compute the FV of the AOR the following way (I took this formula from the CFAI book, r.53 ex10)
FV=PV+(PVx (d/y)xAOR)
So in this case, the result is FV=1000+(1000X(73/360)X0.004). So FV=1000.81111
Now I wanted to solve this with the BEY formula and I have the result 0.004056. It’s false and I don’t understand why. Is one of my formula false?
And another question. The “accelerated formula” that I mentioned earlier (with AOR) is very simple/great/easy to use. Do you know if there is also one if we have a discout rate bond?
Thank you very much in advance
Swissfox