What Is Semi-Annual Bond Basis (SABB)?
Semi-annual bond basis (SABB) is a conversion methodology that allows investors to directly compare yields on bonds with varying characteristics. Since bonds come with all sorts of interest rates and payment frequencies, it's essential to be able to find some standard measure to compare different kinds of bonds side-by-side. By using SABB, bonds which do not pay semi-annual coupons can be made equivalent to those that do for evaluation easier.
SABB can be compared with the bond equivalent yield (BEY) calculation, which converts bond coupons instead into an annualized yield.
- Semi-annual bond basis (SABB) is a method for converting bonds that do not pay semi-annual coupons into an equivalent that does.
- Many corporate and government bonds pay semi-annual interest, and so SABB allows for direct comparison of yields with bonds that do not pay on that schedule.
- Most bond brokers will provide the SABB to their clients, but can also be arrived at easily with a financial calculator or investing software.
Understanding Semi-Annual Bond Basis
Semi-annual bond basis can help investors who are considering the purchase of a bond to make sure they’re comparing apples to apples. Bonds issues employ a variety of yield conventions. Some bonds pay interest on an annual basis, while others accumulate interest semi-annually, or twice per year. Corporate bonds typically pay a coupon semi-annually, which means that, if the interest rate on the bond is 4%, each $1000 bond will pay the bondholder a payment of $20 every six months--a total of $40 per year.
U.S. Treasury notes and municipal bonds are other examples of bonds that accrue interest on a semi-annual basis. For this reason, these investments typically have yields quoted on a semi-annual bond basis.
Other bonds that pay interest at a different rate can be converted to a semi-annual bond basis to determine their semi-annual equivalent. In most cases, however, bond yields are expressed in annual, rather than semi-annual, terms.
The semi-annual bond basis calculation can be complicated to understand because it involves complex market factors, including fluctuations in the prevailing interest rate. Bonds may also have different interest rates and maturities. As interest rates in the bond market fluctuate, a bond’s price may deviate significantly from its par value. All these factors will have an impact on the bond yield. If a broker is unable to provide this computation for you and you plan on investing in bonds on a regular basis, you should consider investing in a financial calculator or computer program that can assist you in this calculation.
Semi-Annual Bond Basis Compared to Bond Equivalent Yield
A semi-annual bond basis is not the only way to compare the yields of different fixed-income investments. The bond equivalent yield (BEY) is an alternative formula that converts semi-annual, quarterly,or monthly discount bond yields into an annual yield. The BEY is the yield reported by the Federal Reserve and typically cited in newspapers. However, the BEY is not usually used when considering longer maturity bonds. When comparing longer maturity bonds, convert discount rates to a semi-annual bond basis for the most accurate comparison.