**Step 1:**Calculate yield change ratios as follows: YCR_{t}= r_{t}/ r_{t-1}The yield change ratios are typically daily ratios (i.e., today’s yield or interest rate divided by yesterday’s) that are annualized later at a later step in the process.

**Step 2:**Convert yield change ratios into a continuously compounded return (X_{t}) as follows:**Step 3:**Calculate the average of continuously compounded returns (X_{t}) for the time period.**Step 4:**Sum the squared the differences between the individual continuously compounded rates of return and the average calculated in step 3.**Step 5:**Divide the sum of squared differences by the number of time periods minus 1.**Step 6:**Take the square root of step 5 to arrive at a periodic (commonly daily) standard deviation (σ_{daily}) for the bond’s yield.This value represents the percentage of the yield’s daily standard deviation and not the actual basis point standard deviation.

**Step 7:**Annualize daily percentage standard deviation.- The annual standard deviation of a bond’s yield is equal to the daily standard deviation multiplied by the square root of the number of trading days in a year.
- The convention is 250 trading days per year.
- This value reflects the percentage standard deviation of the yield, not the basis points standard deviation.
**Step 8:**Compute the basis points the standard deviation of the bond’s yield.- A bond’s yield can be analyzed in conjunction with the standard deviation of the yield in basis point terms from step 8 and z-score distribution to create a confidence interval for the bond’s yield.
- Candidates are advised to apply this approach to practice questions in order to completely understand the analysis of yield volatility and be appropriately prepared for the exam.

X

_{t}= ln YCR_{t}= Σ(X

_{t}– X_{average})^{2}
= step 4 value / (n-1)

In the context of statistics, this value represents the yield variance

σ

_{annual}= σ_{daily}× √num. of trading days per yearσ

_{yield}= Yield * σ_{annual}This value will reflect the standard deviation in terms of basis points around the current yield of the bond.

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