Page 54 - FINAL CFA SLIDES DECEMBER 2018 DAY 14
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LOS 52.f: Calculate and interpret yield measures
for fixed-rate bonds, floating-rate notes, and Session Unit 14:
money market instruments., p.45 52. Introduction To Fixed Income Valuation
The effective yield = compound return; frequency of coupon payments is called periodicity of the annual rate.
Example: Adjusting yields for periodicity: An Atlas Corp. bond is quoted with a YTM of 4% on a semi-annual
bond basis. What yields should be used to compare it with a quarterly-pay bond and an annual-pay bond?
Answer:
4% (semi-annual) = Effective Yield = 2% (per 6-month period) (periodicity of 2)
2
tanties
Compared to annual-pay bond, EAY = 1.02 – 1 = 4.04% (periodicity of 1)
4
Compared to quarterly = (1 + 4.04/4) – 1 = 3.98% (periodicity of 4)
½
Or yield of 2% per six months = 1.02 – 1 = 0.995% * 4 = 3.98%
Street convention - bond yields calculated using the stated coupon payment dates
True yield – bond yields calculated using actual coupon payment dates
