The six month and one-year rates are 3% and 4% per annum with semiannual compounding. Which of the following is closest to the one-year par yield expressed with semiannual compounding?
A. 3.99%
B. 3.98%
C. 3.97%
D. 3.96%
A
The six month rate is 1.5% per six months. The one year rate is 2% per six months. The one year par yield is the coupon that leads to a bond being worth par. A is the correct answer because (3.99/2)/1.015+(100+3.99/2)/1.022 = 100 . The formula in the text can also be used to give the par yield as [(100-100/1.022)×2]/(1/1.015+1.022)=3.99 .
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