The six month and one-year rates are 3% and 4% per annum with semiannual compounding.Which of the following is closest to the one-year par yield expressed with semiannual compounding?
A) 3.99%
B) 3.98%
C) 3.97%
D) 3.96%

Question

Quizplus · Accepted Answer

The six month rate is 1.5% per six months.The one year rate is 2% per six months.The one year par yield is the coupon that leads to a bond being worth par.A is the correct answer because (3.99/2)/1.015+(100+3.99/2)/1.02² = 100.The formula in the text can also be used to give the par yield as [(100-100/1.02²)×2]/(1/1.015+1.02²)=3.99.

The Six Month and One-Year Rates Are 3% and 4