Calculate the bond equivalent yield and effective annual return on fed funds that are 3 days...

Calculate the bond equivalent yield and effective annual return on fed funds that are 3 days from maturity and have a quoted nominal yield of 6.56%.

Expert Solution

The bond's equivalent yield is computed as follows:

= 6.56% x 365 / 360

= 6.6511111111% or 6.65% Approximately

Effective return is computed as follows:

= (1 + ((0.066511111) / (365 / 3 )) ^{365 / 3} - 1

= (1 + 0.000546667)^{365 / 3} - 1

= 6.88% Approximately

Feel free to ask in case of any query relating to this question

jeff jeffy answered 2 years ago

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