Final answer:
To calculate the bond equivalent yield and effective annual return on a negotiable CD, multiply the quoted nominal yield by 365 and divide by the number of days to maturity. Then, add 1 to the bond equivalent yield and raise it to the power of 365 divided by the number of days to maturity.
Step-by-step explanation:
To calculate the bond equivalent yield and effective annual return on a negotiable CD, you need to know the quoted nominal yield and the number of days to maturity. The bond equivalent yield is calculated by multiplying the quoted nominal yield by 365 and dividing by the number of days to maturity. The effective annual return is calculated by adding 1 to the bond equivalent yield and raising it to the power of 365 divided by the number of days to maturity.
For example, if the quoted nominal yield is 6% and the CD has 135 days to maturity, the bond equivalent yield would be (6% * 365) / 135 = 16.73%. The effective annual return would be (1 + 0.1673)^(365/135) - 1 = 18.51%.