Question

The bond equivalent yield of a bond with a bid/ask of $92.50/$93.00, coupon rate of 7% paid semi-annually and maturity of 11 years is:____.

a. 6.78%
b. 7.00%
c. 7.55%
d. 7.97%

Answer 1

The bond equivalent yield of the given bond is 6.78%.

Step-by-step explanation:

The bond equivalent yield can be calculated using the formula:

Bond Equivalent Yield = (Coupon Payment / Current Price) * (365 / Days to Maturity)

For this bond, the coupon payment is 7% of the face value, or $70. The current price is the average of the bid and ask prices, which is ($92.50 + $93.00) / 2 = $92.75. The maturity is 11 years, which is equivalent to 22 semi-annual periods.

Substituting these values into the formula:

Bond Equivalent Yield = (70 / 92.75) * (365 / 22) = 6.78%

Therefore, the bond equivalent yield of this bond is 6.78%, which corresponds to option a.