Yield Measures: Semiannual Bond Basis Yield

If the yield to maturity on an annual-pay bond is 4.08%, the semiannual bond basis yield is _closest_ to:

Correct. The semiannual bond basis yield is the semiannual yield multiplied by 2. In this case: $$\displaystyle [(1 + 0.0408)^{0.5} - 1] \times 2 \approx 0.040392 \approx 4.04 \%$$.

Incorrect. This answer choice is a result of mistaking 4.08% to be the yield on a semiannual coupon bond and converting it to an effective annual rate, or EAR. The 4.08% rate is actually presented as an EAR, and you were asked to convert it to a semiannual bond basis yield (an annual rate compounded semiannually).

Incorrect. Since 4.08% is the rate on an annual-pay bond, it is expressed as an effective annual rate (EAR). An equivalent bond yield is a stated annual rate compounded semiannually; it will always be less than an EAR.

4.04%.

4.12%.

4.23%.