2004 #14: YTM vs. BEY

[Avi]

The question gives the YTM as 5%. Doesn't that mean that the BEY is \Large \(\sqrt{1.05}-1\)\cdot 2 or 4.939%? When using the calculator to find the price of the bond, isn't the semi-annual interest rate \Large \sqrt{1.05}-1 or 2.4695%, and not 2.5%?

I thouught 2.5% would be the semi-annual rate if the bond-equivalent rate was 5.0%?

[miaomiao]

The first thought I saw this questions was 2.5% semi-annual rate. But what you said seem to make sense.

I will think like this way:

if it is given associated with a price, then it is simple interest
If they require you to calcaulate a yield to maturity, then it is compunded annually.

[erickson]

The question gives the YTM as 5%. Doesn't that mean that the BEY is \Large \(\sqrt{1.05}-1\)\cdot 2 or 4.939%? When using the calculator to find the price of the bond, isn't the semi-annual interest rate \Large \sqrt{1.05}-1 or 2.4695%, and not 2.5%?

I thouught 2.5% would be the semi-annual rate if the bond-equivalent rate was 5.0%?

YTM is a type of yield. BEY is a unit of measurement. A YTM may be quoted as either an Effective Annual Yield or as a Bond Equivalent Yield. It looks like, in this context, the YTM was assumed to be quoted as a BEY -- this is how it's quoted in the WSJ.

[GefilteFish144]

Not clear about whether this type of question is still in the readings. New editions of both BKM and Hull have come out since '04.