# Thread: Effective Annual Yield / Bond Equivalent Yield

1. ## Effective Annual Yield / Bond Equivalent Yield

Effective Annual Yield / Bond Equivalent Yield

Date: May 31, 2011 03:36PM

Hey,

I'm getting confused with Yield calculation.

This is from Schweser Pratice Exam Vol.1, Exam 1 Afternoon Session (Question 114):

Equity Swap; Quarterly payments, dealer pays a fixed rate of 5.5% to the mutual frund, with payments made on the basis of 91 days in the period and 365 days in the year.

Schweser's Calculation: 5.5% * (91/365) = 1.371%

My calculation: (1 + 0,055)^(91/365) - 1 = 1.344%

That makes a huge difference in the actual question, as the opposite yield is 1.358%.

What's wrong with my calculation? I was really sure that it's the correct way to calculate the yield.

Thx!

2. Date: June 1, 2011 04:45PM

Can anyone help me with this problem?

I think the problem occurs because I think, the fixed rate of 5.5% is an EAY but it is supposed to be a BEY.

But I have no clue why it is the way it is.

3. Date: June 1, 2011 05:24PM

you need to find the quarterly period rate. The 5.5% is an annualized rate not a compounded rate. It needs to be unannualized and to do this you need to multiply by 91/365 rather than to the ^ of - I think.

4. Date: June 1, 2011 05:43PM

In all these types of problems, the rate is usually the stated annual rate. Similar to how in questions about mortgages with monthly payments, you just take the given rate/12 instead of taking it to the 1/12 power.

This happens often for me, but I've noticed that although it makes a big difference in end result, usually if you think its compounded and its actually not, the answer won't line up exactly...then you can use intuition and solve it the "other way" to find the answer.

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