Bond Equivalent Yield

B

To determine the bond-equivalent yield of an annual-pay bond, we need to understand what it represents. The bond-equivalent yield is a measure that allows us to compare the yield of an annual-pay bond with the yields of other bonds that may have different payment frequencies, such as semi-annual or quarterly payment bonds. It calculates the annualized yield of an annual-pay bond as if it were a semi-annual bond.

In this case, we are given that the annual-pay bond has a yield to maturity of 7.0%. To find the bond-equivalent yield, we need to calculate the equivalent yield assuming semi-annual payments.

Since the bond pays interest annually, we need to convert the annual yield to a semi-annual yield. To do this, we divide the annual yield by 2. In other words, we assume that each semi-annual payment is half of the annual payment.

So, the bond-equivalent yield is calculated as follows:

Bond-equivalent yield = Annual yield / 2

Bond-equivalent yield = 7.0% / 2

Bond-equivalent yield = 3.5%

Therefore, the bond-equivalent yield of this annual-pay bond is 3.5%, which is less than the original yield to maturity of 7.0%.

The correct answer is B. less than 7.0%.