Bond Equivalent Yield (BEY)

What Is the Bond Equivalent Yield?

In financial terms, the bond equivalent yield (BEY) is a metric that allows investors to compute the annual percentage yield for fixed-come securities, even assuming they are discounted short-term plays that main pay out on a month to month, quarterly, or semi-annual basis.

In any case, by having BEY figures readily available, 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 enables investors to go with additional informed decisions while developing their overall fixed-income portfolios.

Grasping Bond Equivalent Yield

To genuinely comprehend how the bond equivalent yield formula functions, it's important to know the fundamentals of bonds overall and to get a handle on how bonds vary from stocks.

Companies hoping to raise capital may either issue stocks (equities) or bonds (fixed income). Equities, which are distributed to investors as common shares, can possibly earn higher returns than bonds, however they additionally carry greater risk. In particular, on the off chance that a company petitions for financial protection and thusly sells its assets, its bondholders are preferred choice to collect any cash. Provided that there are assets left over do shareholders see any money.

Be that as it may, even on the off chance that a company stays dissolvable, its earnings may in any case fall short of expectations. This could push down share prices and cause losses to investors. Yet, that equivalent company is legally committed to pay back its debt to bondholders, paying little heed to how productive it could conceivably be.

Not all bonds are something very similar. Most bonds pay investors annual or semi-annual interest payments. In any case, a few bonds, alluded to as zero-coupon bonds, don't pay interest by any means. All things being equal, they are issued at a deep discount to par, and investors collect returns when the bond develops. To compare the return on discounted fixed income securities with the returns on traditional bonds, analysts depend on the bond equivalent yield formula.

A Closer Look at the Bond Equivalent Yield Formula

The bond equivalent yield formula is calculated by splitting 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 increased by 365 partitioned by "d," which addresses the number of days left until the bond's maturity. As such, the initial segment of the equation is the standard return formula used to work out traditional bond yields, while the second part of the formula annualizes the initial segment, to determine the equivalent figure for discounted bonds.

Albeit computing the bond equivalent yield can be convoluted, most modern bookkeeping sheets contain worked in BEY number crunchers that can improve on the cycle.

Still confounded? Think about the accompanying model.

Expect an investor purchases a $1,000 zero-coupon bond for $900 and hopes 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 deduct the real price paid for the bond:

• $1,000 - $900 = $100

We then partition $100 by $900 to get the return on investment, which is 11%. The second portion of the formula annualizes 11% by duplicating it by 365 separated by the number of days until the bond develops, which is half of 365. The bond equivalent yield is hence 11% duplicated by two, which emerges to 22%.

Features

• The bond equivalent yield (BEY) formula can assist with approximating what a discounted bond would pay annually, allowing investors to compare their returns with those of traditional bonds.
• Discounted (zero-coupon) bonds have shorter spans than traditional fixed income securities, which makes it difficult to compute their annual yields.
• Fixed income securities come in various forms.