Question

A bank has issued a six-month, $1.0 million negotiable CD with a 0.53 percent quoted annual interest rate (iCD, sp). a. Calculate the bond equivalent yield and the EAR on the CD. b. How much will the negotiable CD holder receive at maturity? c. Immediately after the CD is issued, the secondary market price on the $1 million CD falls to $998,900. Calculate the new secondary market quoted yield, the bond equivalent yield, and the EAR on the $1.0 million face value CD.

Required A: Bond Equivalent Yield ___ EAR____ (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 3 decimal places.)

Required B: CD Holder will receive at maturity_____(Do not round intermediate calculations. Round your answer to nearest whole number.)

Required C: Bond Equivalent Yield____ Secondary Market Quoted Yield______ EAR_____ (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 4 decimal places.

Answer 1

a)
BEY = 0.53(365/360)= 0.5374

EAR =
[1+(r/m)]^m - 1
= [1+(0.005374/365)]^365 - 1
= [1+.000014723]^365 - 1
=[1.000014723]^365 - 1
= 1.005388426 - 1
=0.005388

(b) FV= $1m (1 +.0053/2) = $
1,002,650

(c)
DY = [(F - P) / F] x 360 / D
= [(1 million - 998,900) / 1 million] x 360 / D
= 1100 / 1 million x 360/D
=0.396

BEY=
DY = [(F - P) / P] x 365 / D
= [(1 million - 998,900) / 998,900] x 365 / D
= 1100 / 998,900 x 365/D
=0.4019

EAR = [1+(r/m)]^m - 1
=[1+(0.004019/365)]^365 - 1
= [1 +0.004019/365]^365 - 1
= 0.4027