A 50-day maturity money market security has a bond equivalent yield of 3.60 percent. The security's EAR is: Multiple Choice O O O O 3.69 percent. 3.61 percent. 3.55 percent. 3.87 percent. 3.66 percent.
A 50-day maturity money market security has a bond equivalent yield of 3.60 percent. The security's EAR is: Multiple Choice O O O O 3.69 percent. 3.61 percent. 3.55 percent. 3.87 percent. 3.66 percent.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Question:**
"A 50-day maturity money market security has a bond equivalent yield of 3.60 percent. The security's EAR is:"
**Multiple Choice:**
- ○ 3.69 percent.
- ○ 3.61 percent.
- ○ 3.55 percent.
- ○ 3.87 percent.
- ○ 3.66 percent.
**Explanation:**
This question is related to finding the Effective Annual Rate (EAR) of a money market security given the bond equivalent yield. The EAR is a measure used to compare the annual interest between investments with different compounding periods. To find EAR from a bond equivalent yield, certain financial equations are applied, taking into account the compounding effect over the period.
Use the following formula to calculate EAR:
\[ \text{EAR} = \left(1 + \frac{\text{Bond Equivalent Yield}}{n}\right)^n - 1 \]
Where \( n \) is the number of compounding periods per year. Here, with a 50-day maturity, determine \( n \) based on the number of days in a year (commonly 365) to convert to the appropriate compounding intervals.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd18c5f74-fa3a-4c3b-95e6-1e7ad6c6f10c%2F96282f6e-3d61-4838-8440-afe9a4afbf7b%2Fqzovtm_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Question:**
"A 50-day maturity money market security has a bond equivalent yield of 3.60 percent. The security's EAR is:"
**Multiple Choice:**
- ○ 3.69 percent.
- ○ 3.61 percent.
- ○ 3.55 percent.
- ○ 3.87 percent.
- ○ 3.66 percent.
**Explanation:**
This question is related to finding the Effective Annual Rate (EAR) of a money market security given the bond equivalent yield. The EAR is a measure used to compare the annual interest between investments with different compounding periods. To find EAR from a bond equivalent yield, certain financial equations are applied, taking into account the compounding effect over the period.
Use the following formula to calculate EAR:
\[ \text{EAR} = \left(1 + \frac{\text{Bond Equivalent Yield}}{n}\right)^n - 1 \]
Where \( n \) is the number of compounding periods per year. Here, with a 50-day maturity, determine \( n \) based on the number of days in a year (commonly 365) to convert to the appropriate compounding intervals.
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