Performance Measurement

Suppose for simplicity that the coupon could be reinvested in an identical
bond. The future value is given by equation (7.9):
The semiannual bond has the same future value as an annual-pay bond
with a 10.25 percent coupon. This means that a 10 percent semiannual
bond has an effective annual yield of 10.25 percent.
Daily Compounding
In the 1970s, savings institutions used this interest-on-
interest effect to pay a higher effective rate than the allowable ceiling. If a
bank paid 10 percent interest compounded daily, the investor would have a
balance (future value) of $110.5156 at the end of one year. The formula
for daily compounding is shown in equation 7.13:

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