Effective Annual Yield / Bond Equivalent Yield getting, question, payments, opposite, difference

busprof

Hey,

I'm getting confused with Yield calculation.

This is from Schweser Pratice Exam Vol.1, Exam 1 Afternoon Session (Question 114):

Equity Swap; Quarterly payments, dealer pays a fixed rate of 5.5% to the mutual frund, with payments made on the basis of 91 days in the period and 365 days in the year.

Schweser's Calculation: 5.5% * (91/365) = 1.371%

My calculation: (1 + 0,055)^(91/365) - 1 = 1.344%

That makes a huge difference in the actual question, as the opposite yield is 1.358%.


What's wrong with my calculation? I was really sure that it's the correct way to calculate the yield.

Thx!

kamara5

Can anyone help me with this problem?

I think the problem occurs because I think, the fixed rate of 5.5% is an EAY but it is supposed to be a BEY.

But I have no clue why it is the way it is.

orang3eph

you need to find the quarterly period rate. The 5.5% is an annualized rate not a compounded rate. It needs to be unannualized and to do this you need to multiply by 91/365 rather than to the ^ of - I think.