quick Fixed Income question

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burberryjam

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Hi
I am struggling with Fixed Income, in particular when to annualise by compouding or when to annualise by simple multiplication. An example asks for the annual yield to maturity:
5 years to maturity
price = 101
par value = 100
coupon = 6% paid semiannually
I would find the semiannual yield to maturity of 2.8835%, then compound this over two semiannual periods to get the annualised yield to maturity (5.85%). The answer is apparently to multiply this by 2 to get 5.767%. I would consider 5.85% to be the YTM, and 5.767% to be the BEY.
Am I missing something here? If I am asked to find the annual YTM is this different to the annualised YTM?
Thanks for any help..
 
I think they are asking for BEY when it is dealing with semi annual coupon payment bonds, and not the effective annual yield.
 
YTM means yield to maturity, and is usually quoted as an annual yield.
However, there is nothing in the phrase “yield to maturity” that requires a particular methodology to present that annual yield. Thus, you could have a YTM quoted as an EAY, or as a BEY, or as a nominal yield compounded monthly, or as virtually anything else.
Conventionally, YTM for bonds is quoted as a BEY, but there’s nothing sacrosanct about that convention.
 
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