A bank has issued a six-month, $1.7 million negotiable CD with a 0.52 percent qu

Question

A bank has issued a six-month, $1.7 million negotiable CD with a 0.52 percent quoted annual interest rate (iCD, sp).

a. Calculate the bond equivalent yield and the EAR on the CD.
b. How much will the negotiable CD holder receive at maturity?
c. Immediately after the CD is issued, the secondary market price on the $2 million CD falls to $1,698,500. Calculate the new secondary market quoted yield, the bond equivalent yield, and the EAR on the $1.7 million face value CD.

PLEASE EXPLAIN ALL WORK AND SHOW ALL STEPS

Explanation / Answer

a Bond equivalent yield 0.5272% =0.52%*(365/360) Effective annual return 0.5286% =(1+(0.005272/365))^365-1 b Value at maturity $ 1,704,420 =1700000*(1+0.52%/2) c SP quoted yield 0.1765% =((1700000-1698500)/1700000)*360/180 Bond equivalent yield 0.1791% =((1700000-1698500)/1698500)*365/180 Effective annual return 0.1793% =(1+0.1791%/365)^365-1

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