Can anyone enlighten me with the below question gotten from Kaplan Schweser book 4 Reading 44.3 LOS 44.h page 278, money market yields example, Question 3
A bank deposit for 100days is quoted with an add-on yield of 1.5% based on a 360-day year.
Calculate the bond equivalent yield(BEY) and the yield on a semiannual bond basis.
The model answer is as below:
- BEY = 1.5% x (365/360) = 1.5208%
- 1.5% x 100/360 = 0.4167%
EAY = 1.004167^365/100 - 1= 1.5294%
Equivalent semiannual yield = 1.015294^0.5 - 1= 0.7618%
Annual yield = 0.7618 x 2 = 1.5236%
I got no issue with 1., but I’ve got confused with 2., and after 2 hours of reading around the forum, I’ve come out with below working, which I think would be easier to understand if it’s to be taught in the textbook, please enlighten me if there’s any wrong with my working.
Compounding frequency/periodicity = 365/100= 3.65
Since we have BEY of 1.5208% from 1., we can use the EAY formula directly - (1+(0.015208/(365/100)))^(365/100) - 1 = 1.5292% (slight different to model answer)
Semiannual effective rate = 1.015292^0.5 - 1 = 0.7617%
Annual yield = 2 x 0.7617% = 1.5234%
My answer is slightly different from the sample answer, are my workings wrong or correct and discrepancies were just due to rounding?