Question

7. You can purchase a 10 year, 4.500% coupon note that pays interest quarterly and has a quoted yield to maturity of 3.855%. However, you prefer to invest in semiannual coupon bonds.

(a) What quoted yield to maturity on a semiannual coupon bond would make you indifferent between that bond and the quarterly coupon bond described above?

(b) There is a special name for the yield to maturity on a semiannual coupon bond. What is it?

Answer 1

1.

(4.5%*1000/2)/(r/2)*(1-1/(1+r/2)^20)+1000/(1+r/2)^20=(4.5%*1000/4)/(3.855%/4)*(1-1/(1+3.855%/4)^40)+1000/(1+3.855%/4)^40

=3.8526%

2.

Bond Equivalent Yield