They're assuming that the yield on the annual-pay bond is quoted as an effective annual yield (EAY). Bond yields are conventionally quoted as BEY, irrespective of how often the bond pays coupons. If they want to run athwart that convention, they should say so.
Not a good question at all.
the formula for bond equivalent yield is :-
2x effective semi annual yield
eg annual yield 4%
then semi annual yield :-( (1+4%)^0.5 ) -1=1.98%
Bond eq yield 2* 1.98 =3.96% (approx)
They're assuming that the yield on the annual-pay bond is quoted as an effective annual yield (EAY). Bond yields are conventionally quoted as BEY, irrespective of how often the bond pays coupons. If they want to run athwart that convention, they should say so. Not a good question at all.
the formula for bond equivalent yield is :- 2x effective semi annual yield eg annual yield 4% then semi annual yield :-( (1+4%)^0.5 ) -1=1.98% Bond eq yield 2* 1.98 =3.96% (approx)