BEY versus Effective Annual Yield

you guys know that you can do the conversion with the Ba2+ right?
i get 4.74 too
 
If you look on page 129 of schweser book 3 they calculate it the way I did.
Not sure.
 
if you hit 2nd + 2(Iconv) you can get the relationship between nominal rates, compoundings and effective rate. you can calculate either by using the other 2
 
My guess is the difference comes from the fact that your subperiod return is calculated using a 360 day convention and you total EAR is calculated using a 365 convention. So if you take you total EAR and used the formula to get the BEY (like hk) you get a different answer than if you take the subperiod return and multiply by two (you would usually get the same answer).
That is a freaking hell of an answer right there!
 
mwvt9 Wrote:
——————————————————-
> If you look on page 129 of schweser book 3 they
> calculate it the way I did.
>
> Not sure.
Good find. But they actually calculate it the way we think it should be (NOT the way they did on my class slides). It’s confusing because on page 126 of Book 3 (your example), they are moving from BEY to EAR and we are moving from EAR to BEY.
(looks like we crossed posts – not sure about the day count thing, but at least I’m sure I remembered how to calculate BEY correctly now!)
Now… back to the salt mines.
 
It has to be the day count. Look at the equations:
premium value (at time=60):
3000 * (1+(4.5% + 1%)*(60/360)) = 3027.5
principal + interest (at time=270):
1000000*(1+(4%+1%)*180/360) = 1,025,000
option payoff (at time=270, see footnote):
1000000*(4.3%-4%)*(180/360) = 1500
return = (1,025,000 + 1500) / (1,000,000 + 3027.5) = 1.023402
to this point we have assumed a 360 day year
EAR = [1.023402 ^ (365/180) ] - 1 = 4.802413%
Notice we switched to 365 to get the effective annual rate
BEY = [((1 + EAR)^0.5) - 1] * 2 = 4.7461%
So this BEY here has the assumption of a 365 day compounding in it as it uses the anser from above to get back to BEY (discounts 365 ear back to half year and multply by 2).
If instead you took:
return = (1,025,000 + 1500) / (1,000,000 + 3027.5) = 1.023402
which has only used 360 days to this point and subtracted 1 and multplied by 2 you would get my answer.
I am not sure which is right!
 
I am pretty sure the BEY is just the holding period yield times the number of periods. So I actually think there answer is correct here.
Normally it wouldn’t matter because the EAR could just be converted using the formula hk used, but that doesn’t work in this case.
Do you have the ability to ask schweser in your classes?
 
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