quick Fixed Income question

CFA Level I Fixed Income
#1

Hi

I am struggling with Fixed Income, in particular when to annualise by compouding or when to annualise by simple multiplication. An example asks for the annual yield to maturity :

5 years to maturity price = 101 par value = 100 coupon = 6% paid semiannually

I would find the semiannual yield to maturity of 2.8835%, then compound this over two semiannual periods to get the annualised yield to maturity (5.85%). The answer is apparently to multiply this by 2 to get 5.767%. I would consider 5.85% to be the YTM, and 5.767% to be the BEY.

Am I missing something here? If I am asked to find the annual YTM is this different to the annualised YTM?

Thanks for any help…

#2

I think they are asking for BEY when it is dealing with semi annual coupon payment bonds, and not the effective annual yield.

#3

YTM means yield to maturity, and is usually quoted as an annual yield.

However, there is nothing in the phrase “yield to maturity” that requires a particular methodology to present that annual yield. Thus, you could have a YTM quoted as an EAY, or as a BEY, or as a nominal yield compounded monthly, or as virtually anything else.

Conventionally, YTM for bonds is quoted as a BEY, but there’s nothing sacrosanct about that convention.

#4

Thanks magician

Keeping me on my toes

#5

You’re welcome.