26 If the overnight Fed funds rate is quoted as 275 percent

2-6 If the overnight Fed funds rate is quoted as 2.75 percent, what is the bond equivalent rate? Calculate the bond equivalent rate on Fed funds if the quoted rate is 4.25 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)) Bond Equivalent Rate 2.75 percent % 4.25 percent %

Solution

The BEY is a calculation for restating semi-annual, quarterly or monthly discount bond or note yields into an annual yield.

Now, for the Overnight Fed Fund Rate, it is a day yield quoted with 360 day basis.

When Overnight Fed Fund rate = 2.75%

Per day Fed Fund rate = 2.75%/360

BEY = 2.75%/360 * 365 = 2.79%

When Overnight Fed Fund rate = 4.25%

Per day Fed Fund rate = 4.25%/360

BEY = 4.25%/360 * 365 = 4.31%