Bond Equivalent Yield Calculator
This calculator determines the Bond Equivalent Yield (BEY) for a discount instrument (like a T-bill). The discount rate is typically quoted on a 360-day basis, while BEY restates this on a 365-day basis and considers the actual purchase price.
What is Bond Equivalent Yield (BEY)?
Bond Equivalent Yield (BEY) is a standardized method to annualize the yield of short-term debt securities that do not pay periodic interest. Since many bonds pay interest semi-annually, BEY converts the yield of a discount-based security (like a Treasury bill) into an annualized figure that can be directly compared with traditional bonds.
Key Features of BEY:
- Used for zero-coupon bonds, Treasury bills, and other discount instruments.
- Converts discount yields into an annual percentage rate (APR) based on a 365-day year.
- Allows for apples-to-apples comparisons between different fixed-income securities.
Why is BEY Important?
- Standardized Comparison
- Investors often compare bonds, T-bills, and commercial paper. BEY helps standardize yields for fair comparisons.
- Evaluating Short-Term Investments
- Since T-bills are sold at a discount and mature at par, BEY helps calculate their effective annual return.
- Better Decision-Making
- By converting yields into a common format, investors can choose the best-performing securities.
How to Calculate Bond Equivalent Yield (BEY)
The formula for BEY depends on whether the security is a discount instrument (like a T-bill) or a bond with periodic interest payments.
1. BEY for Discount Securities (e.g., Treasury Bills)
For short-term securities that do not pay periodic interest, the BEY formula is:
BEY = [(Face Value - Purchase Price) / Purchase Price] × (365 / Days to Maturity)
Where:
- Face Value = Par value at maturity
- Purchase Price = Current market price
- Days to Maturity = Time until the security matures
2. BEY for Semi-Annual Bonds
If a bond pays semi-annual coupons, its yield can be directly compared using BEY by doubling the semi-annual yield:
BEY = 2 × (Semi-Annual Yield)
BEY vs. Other Yield Measures
| Yield Type | Definition | Use Case |
|---|---|---|
| Bond Equivalent Yield (BEY) | Annualizes discount yield for comparison with bonds | T-bills, zero-coupon bonds |
| Effective Annual Yield (EAY) | Accounts for compounding | More accurate for reinvestment |
| Yield to Maturity (YTM) | Total return if held to maturity | Coupon-paying bonds |
| Current Yield | Annual coupon payment / Current price | Quick yield estimate |
Key Differences:
- BEY assumes simple interest (no compounding).
- EAY considers compounding, making it higher than BEY for the same investment.
- YTM is used for bonds with coupons, while BEY is better for discount securities.
Limitations of BEY
- Ignores Compounding
- BEY assumes simple interest, which may understate returns for long-term investments.
- Best for Short-Term Securities
- More accurate for T-bills (under 1 year) than long-term bonds.
- Not Suitable for All Bonds
- BEY is less useful for bonds with irregular payment structures.
Conclusion
Bond Equivalent Yield (BEY) is a powerful tool for comparing fixed-income securities, especially short-term discount instruments like T-bills. By converting yields into an annualized format, investors can make informed decisions.
Key Takeaways:
✅ BEY standardizes yields for easy comparison.
✅ Best for T-bills & zero-coupon bonds.
✅ Does not account for compounding (unlike EAY).
✅ A BEY calculator simplifies manual computations.
By mastering BEY, you can better evaluate investment opportunities and optimize your fixed-income portfolio.