What is a Semi-Annual Bond Basis (SABB)

Semi-annual bond basis (SABB) is a conversion metric that allows investors to compare rates on bonds with varying characteristics. Since bonds come with all types 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 a semi-annual bond basis (SABB), the conversion of the interest rate of a bond which pays other than semi-annually into its equivalent to makes evaluation easier.

BREAKING DOWN Semi-Annual Bond Basis (SABB)

Semi-annual bond basis (SABB) can help investors who are considering the purchase of a bond from a brokerage to make sure they’re comparing apples to apples. Bonds rely on a variety of yield conventions. Some bonds accrue interest on an annual basis, while others accumulate interest semi-annually, or twice per year. 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.

U.S. Treasury notes corporate bonds and municipal bonds are 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. 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 a 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.