Formula to Calculate Bond Equivalent Yield (BEY)

An investor needs to know the bond equivalent yield formula. It allows the investor to calculate the annual yield of a bond sold at a discount.

Bond Equivalent Yield Formula = (Face value – Purchase Price) / Purchase Price * 365/d

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Bond Equivalent Yield Formula (wallstreetmojo.com)

Here, d = days to maturity

Example

Mr. Yamsi is confused about two bonds he is considering for investments. One bond offers $100 per bond as a purchase price, and another offers $90 per bond. Both fixed-income securities would offer $110 per bond after six months (for the first) and 12 months (for the second). Which one should Mr. Yamsi invest in?

This is a classic case of being confused between two fixed-income securities.

However, we can easily find the BEY to see which investment is more fruitful for Mr. Yamsi.

For the first bond, here’s the calculation –

Bond Equivalent Yield = (Face Value – Purchase Price) / Purchase Price * 365 / d

  • Or, BEY = ($110 – $100) / $100 * 365 / 180Or, BEY = $10 / $100 * 2.03Or, BEY = 0.10 * 2.03 = 20.3%.

Now, let’s calculate the BEY for the second bond.

BEY = (Face Value – Purchase Price) / Purchase Price * 365 / d

  • Or, BEY = ($110 – $90) / $90 * 365 / 365Or, BEY = $20 / $90 * 1 = 22.22%.

However, if time becomes a factor, Mr. Yamsi may choose the first bond because it is six months. It is offering a staggering 20.3% return.

Interpretation

If you look closely, you will see two parts of this formula for bond equivalent yield.

  • The first part talks about the face value and the purchase price. In short, the first part depicts the return on investment for the investor. For example, if an investor pays $90 as a purchase price for the bondPrice For The BondThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more. And at maturity within 12 months, he would receive $100; the return on investments would be = ($100 – $90) / $90 = $10 / $90 = 11.11%.The second part is all about the time horizon. If the maturity for the bond is six months from now, then d would be 180 days. And the second part would result in – 365 / 180 = 2.03.

Use and Relevance

As an investor, you have many options. When you have so many options, you would only choose the option which will provide you with the most return.

That’s why you need to use the bond equivalent yield formula to determine whether a particular investment is better or worse than the other investments.

However, to calculate the bond equivalent yield, you must remember that these investments don’t offer annual payments. And you can use this formula for fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more securities. For example, if you find out about a bond offering a discount on the purchase price, first be sure to find the bond equivalent yield and then go ahead (if you want to).

Bond Equivalent Yield Calculator

You can use the following Bond Equivalent Yield Calculator

Bond Equivalent Yield in Excel (with excel template)

Let us now do the same example above in Excel. This is very simple. You need to calculate BEY for both of these bonds.

You can easily calculate the BEY in the template provided.

This has been a guide to Bond Equivalent Yield (BEY) Formula. Here we learn how to calculate bond equivalent yield using its formula, practical examples, and excel templates. You may also learn more about fixed income with these articles below –

  • Callable Preferred StockCallable Preferred StockCallable preferred stock is stock in which the issuer has the right to repurchase such issued stock after a pre-decided date at a specific price mentioned in the prospectus when the stock is issued. Such a price cannot be changed at any point in the future or at the time of redemption.read moreYield in ExcelYield In ExcelThe Yield Function in Excel is an in-built financial function to determine the yield on security or bond that pays interest periodically. It calculates bond yield by using the bond’s settlement value, maturity, rate, price, and bond redemption.read moreCurrent Yield of a BondCurrent Yield Of A BondThe current yield formula essentially calculates the yield on a bond based on the market price instead of face value. The current yield of bond= Annual coupon payment/current market priceread moreCapital Gains Yield FormulaTreasury StripsTreasury StripsTreasury Strips are US bonds which categorize principal payments & interest payments as 2 different entities & let the investors trade as per the same. They are virtually free from credit risk, sold at a discount & receive the total face value at the time of maturing. read more