. The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon o
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Question
. The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %The answer should be C but I can't figure out how . The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %
The answer should be C but I can't figure out how . The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %
The answer should be C but I can't figure out how
Explanation / Answer
Effective yield rate on 2 nd year = (1 + i /n)n - 1 , where i = interest and n= number of month or year
= (1 + 0.058 / 1)1 - 1
=1.058 - 1
= 0.058
So, the interst rate will be 0.058 * 100 which is 5.8%
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