Bond Equivalent Yield
In financial terms, the bond equivalent yield (BEY) is a metric that lets investors calculate the annual percentage yield for fixed-come securities, even if they are discounted short-term plays that only pay out on a monthly, quarterly, or semi-annual basis.However, by having BEY figures at their fingertips, 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 empowers investors to make more informed choices when constructing their overall fixed-income portfolios.
Bond Equivalent Yield (BEY)
Definition
Bond Equivalent Yield (BEY) is a metric used to calculate the annualized percentage yield of fixed-income securities. Even if these securities are discounted short-term investments that pay monthly, quarterly, or semi-annually, BEY helps investors compare their performance with traditional fixed-income securities that generate annual yields over a year or longer.
Origin
The concept of Bond Equivalent Yield originated from the need in financial markets to compare different types of fixed-income securities. As financial products diversified, investors required a standardized way to compare yields of bonds with different maturities and payment frequencies. BEY emerged as a widely used tool for this purpose.
Categories and Characteristics
Bond Equivalent Yield is primarily used for the following types of fixed-income securities:
- Short-term Treasury Bills: These are typically discounted short-term government bonds, and BEY helps investors calculate their annualized yield.
- Corporate Bonds: Short-term bonds issued by corporations can also have their annualized yield calculated using BEY.
- Municipal Bonds: Short-term bonds issued by local governments are also applicable for BEY calculation.
The characteristic of BEY lies in its standardized calculation method, allowing direct comparison of yields from different types and maturities of bonds.
Specific Cases
Case 1: Suppose an investor purchases a short-term Treasury bill with a face value of $1,000 at a purchase price of $950, with a maturity of 6 months. Using BEY, the investor can determine the annualized yield of this Treasury bill and compare it with other one-year fixed-income securities.
Case 2: A company issues a batch of short-term bonds with a face value of $1,000 at a purchase price of $980, with a maturity of 3 months. Investors can use BEY to calculate the annualized yield of these bonds, aiding them in making more informed decisions when constructing their investment portfolios.
Common Questions
Q: Why is Bond Equivalent Yield needed?
A: BEY provides a standardized way for investors to compare yields of bonds with different maturities and payment frequencies, enabling more informed investment decisions.
Q: What is the formula for calculating BEY?
A: The formula for BEY is:BEY = [(Face Value - Purchase Price) / Purchase Price] * (365 / Holding Days)
