Effective annual yield: Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment?
A) 12.80%
B) 6.40%
C) 13.21%
D) None of the above

Question

Quizplus · Accepted Answer

To calculate the effective annual yield (EAY) we need to use the following formula: 
EAY = (1 + (semiannual yield/100))^2 - 1

Substituting the values, we get: 
EAY = (1 + (6.4/100))^2 - 1 
EAY = 0.0664 or 6.64%

Therefore, the correct answer is option C, which is 13.21% (twice the semiannual yield).

Effective Annual Yield: Suppose an Investor Earned a Semiannual Yield