What is a Coupon Equivalent Yield (CEY)
The coupon equivalent yield - CEY is used to calculate an annualized yield on Treasury bills, as well as on short-term corporate bonds.
It is the stated rate of return on bonds without accounting for any compounding.
The coupon equivalent yield also is sometimes known as a bond equivalent yield.
BREAKING DOWN Coupon Equivalent Yield (CEY)
The coupon equivalent yield - CEY is a simple rate of interest that takes into account the discounted purchase price of the bond. It allows investors to compare the return on, say a 60-day Treasury bill to a one-year coupon-paying bond, or another similar security that pays an annual yield. Investors can use the coupon equivalent yield to calculate which investment results in better annualized performance.
The formula for calculating CEY is:
(The bond's face value - its current price) divided by its current price ) x (365/ days until the Treasury bill maturity)
For example, say a bond has a face value of $10,000, and its current price is $9.970. It has 60 days until maturity. Using the calculation, its coupon equivalent yield is 1.83%.
The coupon equivalent yield helps investors calculate what the return on a short-term Treasury bill would have been, had they been able to collect the same rate of interest for a full year.
Of note, some investors also calculate a coupon equivalent yield for commercial paper and other short-term corporate bonds. This requires a slightly different calculation, as follows:
(Interest expected for the period/ the bond price) x (365/ days until the bond matures)
In this example, say a bond with a $1,000 face value sells for $990. Annual interest is 2%. The bond matures in 60 days. If one interest is expected during the maturity period, then this payment will be $10.
($10/990) x (365/60)
In this instance, the bond's coupon equivalent yield is 6.14%.
Coupon Equivalent Yield vs. Effective Annual Yield
The coupon equivalent should not be confused with an effective annual yield, which takes into account compounding. The coupon equivalent yield is a nominal yield, so it does not use any compounding. It, therefore, gives a more conservative estimation of yield compared with an effective annual yield. The latter tends to be used in advertisements for short-term investment returns, as the compounding tends to make the return look a bit better.