Lecture 2 QuestionsSecond Set
1.
An investor wants to measure precisely the difference in yields between 3day bills and
6month bills. Suppose that today’s WSJ ask yield (bondequivalent yield) is reported as
8% for a 3day bill and 8.2% for a 180day bill. Comparing these yields directly suggests
that somewhat higher yields can be earned by investing for 6 months, rather than 3days.
Is this still true when you take into account the different compounding periods? Please
show your work.
Answer:
Please see lecture 2 notes, ‘measuring the difference in yields between Tbills
with different maturities’ formula. Calculate
N
2
, when
n
1
3
=
,
n
2
1
8
0
=
,
N
1
8
%
=
.
N
2
8
1
5
7
%
=
.
. Although 8.157% is smaller than 8.2%, it’s still bigger than the 3day
bill’s yield.
2.
What are the three complexities in fixed income security priceyield relationships?
Answer:
1) Prices and yields for bonds with different compounding periods are calculated with a
change in formulas. Also, yields for bonds with different compounding periods are not directly
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 Spring '08
 cobus
 Interest Rates, Zerocoupon bond, yields, different compounding periods

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