18. Identify and explain the problems with the discount yield and explain how th
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18. Identify and explain the problems with the discount yield and explain how the problems can be eliminated. 19. What is the meaning of "duration of a bond" and why is knowing a bond's duration useful? 20. Identify and explain the differences between a bank's periodic and cumulative GAP. 21. Discuss three factors that affect net interest income. 22. If you invested $2,700 today and another $4,000 in two years, to the nearest dollar, how much will your investment be worth in seven years? Assume an 5.8% annual compound return.Explanation / Answer
solution 18 :- Discount yield is a measure of a bond's rate of return to an investor, stated as a percentage, and discount yield is used to calculate the yield on municipal notes, commercial paper and treasury bills sold at a discount. Discount yield is calculated as (par - purchase price)[/par value] * 360/days to maturity, and the formula uses a 30-day month and 360-day year to simplify the calculation.
Securities that are sold at a discount use the discount yield to calculate the investor's rate of return, and this method is different than bond accretion. Bonds that use bond accretion can be issued a par value, at a discount or at a premium, and accretion is used to move the discount amount into bond income over the remaining life of the bond.
Assume, for example, that an investor purchases a $1,000 corporate bond for $920, and the bond matures in 10 years. Since the investor receives $1,000 at maturity, the $80 discount is bond income to the owner, along with the interest earned on the bond. Bond accretion means that the $80 discount is posted to bond income over the 10-year life, and an investor can use a straight-line method or the effective interest rate method. Straight-line posts the same dollar amount into bond income each year, and the effective interest rate method uses a more complex formula to calculate the bond income amount.
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