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Seabreeze Mortgage Securities has mortgage backed securities outstanding that have a monthly cash flow yield of 0.325%. What is their annualized cash flow yield?
Correct Answer: B
By convention in the bond market, the monthly yield is compounded for six months and then annualized using the bond-equivalent method. 6 -month compounded yield = (1 + 0.00325)6 - 1 = 0.01966, or 1.966%, Annualized yield = 1.966 x 2 = 3.93%