How to Calculate the Bond Equivalent Yield
There are 2 main ways to invest in a company; stocks or bonds. Stocks represent ownership and bonds represent debt for the company. One common calculation for measuring the annual return on a bond is the bond equivalent yield (BEY).
It is a way to turn a semi-annual, quarterly, or monthly paying bond yield into an annual bond yield, which allows investors to compare bond performance on equal terms.
5 Steps to Calculate the Bond Equivalent Yield
1. Review the formula for BEY.
The equation is: [(1000-Purchase Price)/Purchase Price)] x (365/days to maturity).
This assumes a par (stated) value of $1,000 which is the par value of most bonds.
2. Determine the purchase price.
This is the price you paid for the bond. If you purchased at a “premium” it means the price is over par ($1,000), however, if you purchased the bond at a “discount” it means the price paid is under par. Let’s assume you paid $950 for a bond.
3. Determine the days til maturity.
The days til maturity are the number of days before the bond matures. Let’s say we have a bond with a maturity date of January 1, 2020 and the current date is January 1, 2015. This means we have 5 years until the bond mature or 1,825 days (365 x 5).
4. Calculate the BEY.
Substitute the variables in purchase price and days til maturity into the equation. The equation is: [(1000-950)/950)] x (365/1825) = .0105. This is the simple (not compounded) rate of interest annualized.
5. Multiply the answer by 100 for the rate.
For our example the answer is 1.05 percent.
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