Loading the player...

What is a 'Bond Equivalent Yield - BEY'

The bond equivalent yield (BEY) allows fixed-income securities whose payments are not annual to be compared with securities with annual yields. The BEY is a calculation for restating semi-annual, quarterly or monthly discount bond or note yields into an annual yield, and is the yield quoted in newspapers. Alternatively, if the semi-annual or quarterly yield to maturity of a bond is known, the annual percentage rate (APR) calculation may be used.

BREAKING DOWN 'Bond Equivalent Yield - BEY'

Companies can raise capital in two main ways: debt or equity. Equity is distributed to investors in the form of common shares; it comes second to debt in case of bankruptcy or default, and it may not provide the investor with a return if the company fails. By contrast, debt is considered cheaper for the company to issue and is safer than equity for investors. Still, debt must be paid back by the company, regardless of earnings growth. In this way, it provides a more reliable stream of income for the bond investor. Not all bonds are made equal, however. Most bonds pay investors annual or semi-annual interest payments. Some bonds, referred to as zero-coupon bonds, do not pay interest at all, but are instead issued at a deep discount to par. The investor makes a return when the bond matures. To compare the return on discounted securities with other investments in relative terms, analysts use the bond equivalent yield formula.

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. Take the answer and multiply by 365 divided by d, where "d" equals the number of days until maturity. The first part of the equation is the standard return formula and shows the return on investment. The second portion of the formula annualizes the first part of the formula.

As an example, if an investor buys a $1,000 zero-coupon bond for $900 and expects to be paid par value in six months, he earns $100. The first part of the calculation is par or face value minus the price of the bond. The answer is $1,000 minus $900, or $100. Next, 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 therefore 11% multiplied by two, or 22%.

RELATED TERMS
  1. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  2. Current Yield

    Annual income (interest or dividends) divided by the current ...
  3. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  4. Dollar Price

    The percentage of par, or face value, at which a bond is quoted. ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
Related Articles
  1. Investing

    Calculating Bond Equivalent Yield

    The bond equivalent yield calculates the semi-annual, quarterly or monthly yield on a discount bond or note.
  2. Investing

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  3. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  4. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  5. Financial Advisor

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  6. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  7. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  8. Investing

    How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

    Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
  9. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
RELATED FAQS
  1. What is the relationship between current yield and yield to maturity (YTM)?

    Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >>
  2. Should investors focus more on the current yield or face value of a bond?

    Find out when investors should focus on a bond's current yield versus its face value, including an example of how current ... Read Answer >>
  3. Can a bond have a negative yield?

    The return a bond provides to an investor is measured by its yield, which is quoted as a percentage. Current yield is a commonly ... Read Answer >>
  4. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  5. How does face value differ from the price of a bond?

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
  6. How do I use the holding period return yield to evaluate my bond portfolio?

    Find out how to use the holding period return yield formula to evaluate the performance of bonds in your portfolio, and view ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center