Question

A bank has issued a six-month, $2.8 million negotiable CD with a 0.55 percent quoted annual interest rate (i_{CD, sp}).​

a. Calculate the bond equivalent yield and the EAR on the CD.​

b. Immediately after the CD is issued, the secondary market price on the $3 million CD falls to $2,799,000. Calculate the new secondary market quoted yield, the bond equivalent yield, and the EAR on the $2.8 million face value CD​

Answer 1

A.

Bond Equivalent Yield = 0.55 * 365 / 360

= 0.5576

Effective Annual Return = [ 1 + ( r/m) ]^m - 1

= [ 1 + ( 0.005576 / 365 ) ]³⁶⁵ - 1

= ( 1.000015)³⁶⁵ - 1

=0.5490

B.

SP quoted Yield = [ (F - P) / F ] * 360 / D

Quoted Yield = [ ( $30,00,000 - $27,99,000 ) / $30,00,000 ] * 360

Quoted Yield = 24.12%

Bond Equivalent Yield = [ (F - P) / P ] * 360 / D

Bond Equivalent Yield = [ ( $30,00,000 - $27,99,000 ) / $27,99,000 ] * 360

Bond Equivalent Yield = 25.85%

Effective Annual Return = [ 1 + ( r/m) ]^m - 1

= [ 1 + ( 0.2585 / 365 ) ]³⁶⁵ - 1

= ( 1.00071)³⁶⁵ - 1

=0.2957

Thanks