What Is the Bond Equivalent Yield?
In financial terms, the bond equivalent yield (BEY) is a metric that lets investors calculate the annual percentage yield for fixed-come securities, even if they are discounted short-term plays that only pay out on a monthly, quarterly, or semi-annual basis.
However, by having BEY figures at their fingertips, investors can compare the performance of these investments with those of traditional fixed income securities that last a year or more and produce annual yields. This empowers investors to make more informed choices when constructing their overall fixed-income portfolios.
Understanding Bond Equivalent Yield
To truly understand how the bond equivalent yield formula works, it's important to know the basics of bonds in general and to grasp how bonds differ from stocks.
Companies looking to raise capital may either issue stocks (equities) or bonds (fixed income). Equities, which are distributed to investors in the form of common shares, have the potential to earn higher returns than bonds, but they also carry greater risk. Specifically, if a company files for bankruptcy and subsequently liquidates its assets, its bondholders are first in line to collect any cash. Only if there are assets left over do shareholders see any money.
Key Takeaways
- Fixed income securities come in different forms.
- Discounted (zero-coupon) bonds have shorter durations than traditional fixed income securities, which makes it impossible to calculate their annual yields.
- The bond equivalent yield (BEY) formula can help approximate what a discounted bond would pay annually, letting investors compare their returns with those of traditional bonds.
But even if a company remains solvent, its earnings may nonetheless fall short of expectations. This could depress share prices and cause losses to stockholders. But that same company is legally obligated to pay back its debt to bondholders, regardless of how profitable it may or may not be.
Not all bonds are the same. Most bonds pay investors annual or semi-annual interest payments. But some bonds, referred to as zero-coupon bonds, do not pay interest at all. Instead, they are issued at a deep discount to par, and investors collect returns when the bond matures. To compare the return on discounted fixed income securities with the returns on traditional bonds, analysts rely on the bond equivalent yield formula.
A Closer Look at the Bond Equivalent Yield Formula
The bond equivalent yield formula is calculated by dividing the difference between the face value of the bond and the purchase price of the bond, by the price of the bond. That answer is then multiplied by 365 divided by "d," which represents the number of days left until the bond's maturity. In other words, the first part of the equation is the standard return formula used to calculate traditional bond yields, while the second part of the formula annualizes the first part, to determine the equivalent figure for discounted bonds.
Although calculating the bond equivalent yield can be complicated, most modern spreadsheets contain built-in BEY calculators that can simplify the process.
Still confused? Consider the following example.
Assume an investor buys a $1,000 zero-coupon bond for $900 and expects to be paid par value in six months. In this case, the investor would pocket $100. To determine BEY, we take the bond's face value (par) and subtract the actual price paid for the bond:
We then divide $100 by $900 to obtain the return on investment, which is 11%. The second portion of the formula annualizes 11% by multiplying it by 365 divided by the number of days until the bond matures, which is half of 365. The bond equivalent yield is thus 11% multiplied by two, which comes out to 22%.
FAQs
The bond equivalent yield formula is calculated by dividing the difference between the face value of the bond and the purchase price of the bond, by the price of the bond. That answer is then multiplied by 365 divided by "d," which represents the number of days left until the bond's maturity.
What is the formula for the bond equivalent yield BEY? ›
The bond equivalent is calculated using the face value, purchase price, and the number of days until maturity. The formula is then calculated as ((Face Value - Purchase Price)\(Purchase Price) x (365\Days until maturity).
How to calculate the BEY? ›
The BEY is calculated first by subtracting the discount price from the face value and dividing the result by the discount price. That is multiplied by [365 days divided by days to maturity] and converted to a percentage.
How to calculate bond yield example? ›
Also referred to as a bond's coupon rate, the nominal yield is the annual income divided by the bond's face value. For example, a bond with a $1,000 face value that pays $50 annually has a nominal yield of 5% (50 ÷ 1,000 = 0.05).
How to convert YTM to BEY? ›
For example. YTM is 6%. Therefore the semi-annual YTM is 2.9563%. We can get back to 6% by calculating (1.029563^2)-1 BEY is found by doubling the semi-annual YTM.
What is the yield BEY? ›
What Is the Bond Equivalent Yield? In financial terms, the bond equivalent yield (BEY) is a metric that lets investors calculate the annual percentage yield for fixed-come securities, even if they are discounted short-term plays that only pay out on a monthly, quarterly, or semi-annual basis.
How is equivalent yield calculated? ›
Equivalent Yield is the time-weighted average return that a property will produce and sits between the NIY and Reversionary. It is calculated by running a future cash flow showing each lease event and any new leases or rents as a percentage of the total acquisition costs.
What is the difference between YTM and BEY? ›
Market conditions play a major role in the difference between Bond Equivalent Yield (BEY) and Yield To Maturity (YTM). BEY is calculated based on the current market rate, while YTM considers any future fluctuations in interest rates or economic conditions.
How do you convert money market yield to bond equivalent yield? ›
To convert MMY to bond equivalent yield, multiply MMY by 365/360.
What is the difference between BEY and EAY? ›
YTM is what's called a bond equivalent yield (BEY). Investors can find a more precise annual yield once they know the BEY for a bond if they account for the time value of money in the calculation. This is known as an effective annual yield (EAY).
Bond yield = Annual coupon payment/ Bond price
For instance, a bond with a face value of ₹1,000 promises to pay 10% interest annually, and the current bond price is ₹1,200. The bondholder would receive an 8.33% yield at the current price.
How do you calculate yield formula? ›
Yield calculation and formula
The calculation for yield differs depending on the type of yield. The common formula is income (eg from dividends or interest payments) divided by investment value. This can then be multiplied by 100 to get a percentage figure.
What is a bond yield calculator? ›
The simplest way to calculate a bond yield is to divide its coupon payment by the face value of the bond. This is called the coupon rate. 1. Coupon Rate = Annual Coupon Payment Bond Face Value \text{Coupon Rate}=\frac{\text{Annual Coupon Payment}}{\text{Bond Face Value}} Coupon Rate=Bond Face Value Annual Coupon ...
How to find BEY? ›
To calculate the Bond Equivalent Yield (BEY) for a bond with semi-annual payments, first determine the bond's annual percentage yield (APY). Then use the BEY formula: BEY = (1 + APY/2)^2 - 1. This formula annualizes the bond's yield, making it directly comparable to other bonds.
What is interest equivalent yield? ›
Yield equivalence is the interest rate on a taxable security that would produce a return equal to that of a tax-exempt security, and vice versa.
What is the meaning of equivalent bond? ›
EQUIVALENT BOND FUNCTIONS. Two bond functions may be defined as equivalent when they differ from. one another by a rotation only. A method of finding equivalent bonds is to. set up the most general s-p-d eigenfunction containing shape parameters and.
What is the formula for the yield rate of a bond? ›
The current yield formula equals the annual coupon payment divided by the bond's current market price, expressed as a percentage.
What is the difference between BEY and YTM? ›
BEY is calculated based on the current market rate, while YTM considers any future fluctuations in interest rates or economic conditions.
What is the semiannual bond equivalent yield BEY basis? ›
To calculate the Bond Equivalent Yield (BEY) for a bond with semi-annual payments, first determine the bond's annual percentage yield (APY). Then use the BEY formula: BEY = (1 + APY/2)^2 - 1. This formula annualizes the bond's yield, making it directly comparable to other bonds.
What is the formula for bond equivalent in chemistry? ›
DBE = UN = PBoR = C - (H/2) + (N/2) +1, where: C = number of carbon atoms, H = number of hydrogen and halogen atoms, and N = number of nitrogen atoms. One DBE = one ring or one double bond. Two DBE = two rings, two double bonds, or one triple bond, or one ring plus one double bond.
