The bond equivalent yield, also known as BEY, is a metric that enables investors to measure the annual percentage yield for fixed-income securities, even though they are discounted short-term investments that only pay out monthly, quarterly, or semi-annually. It is utilized to decide the yearly yield on rebate security. Rebate security is a security that is given for not as much as its standard esteem in the auxiliary market. This likewise implies it has a lower loan cost than the current market rate, which is the way it is sold at a lower cost. BEY is not to be confused with the coupon rate on a bond. This helps investors to compare investments with different payout frequencies.
Investors should equate the yield of a short-term security bought at a discount to that of a bond with an annual yield using the bond equivalent yield (BEY). Nonetheless, by having BEY figures readily available, financial backers can contrast the exhibition of these speculations and those of customary fixed pay protections that most recent a year or more and produce yearly yields. As a result, investors will be able to make more educated decisions while putting together their total fixed-income portfolios.
The bond equivalent yield (BEY) is determined by subtracting the price (the amount originally paid) from the face value or par value (the amount paid at maturity), and then dividing the amount by the price. Divide 365 (days) by the number of days before maturity. Multiply that by the first part of the equation, then divide by 100 to get a percentage.
Bond Equivalent Yield (BEY) = ((Par Value – Price) / Price) × (365 / d) × 100
d is days to maturity
For example, The BEY for a bond with a maturity period of 100 days, a par value of $1000, and a discounted price of $975 will be determined as follows:
(($1000 – $975) / $975) × (365 / 100) = 0.0935
The BEY would be 9.35%.
To really see how the security comparable yield equation functions, it’s essential to know the rudiments of securities by and large and to get a handle on how securities contrast from stocks. The BEY count fills in as a valuable device for deciding the yearly yield of a venture that doesn’t make yearly installments. This research helps investors to equate fixed-income securities with annual payments or that are selling at a discount to those with annual yields.
Stocks (equities) or bonds (fixed income) are two choices for companies seeking to collect money. Equities, which are issued to investors in the form of common stock, have a higher return opportunity than bonds, but they also have a higher risk. The Bey is particularly valuable when a financial backer needs to choose at least two fixed speculation items with various developments. Since a return is one of the essential standards for settling on any speculation decision, it turns out to be significant to analyze the paces of return of various venture instruments, notwithstanding the distinction in installment frequencies.
The bond equivalent yield (BEY) formula will help investors equate their returns to those of conventional bonds by calculating what a discounted bond will pay annually. The following points should be kept in mind when measuring BEY for an investment as a simple recap of what it is, why it is used, and how to use it:
- Bond Equivalent Yield is a method that allows investors to compare the yields of two or more bonds.
- BEY is primarily used to measure the annualized value of deep discount or zero-coupon bonds.
- BEY is determined using three factors: the bond’s par value or fair value, the bond’s selling price, and the bond’s maturity date.
- BEY ignores the impact of compounding and, as a result, does not offer a real and fair image in certain cases.
Not all bonds are the equivalent. Most bonds pay financial backers yearly or semi-yearly interest installments. Be that as it may, a few bonds, alluded to as zero-coupon bonds, don’t pay interest by any stretch of the imagination. Instead, they’re sold at a significant discount to par value, and investors get paid when the bond matures. The bond equivalent yield calculation is used by analysts to equate the returns on discounted fixed income securities to the returns on conventional bonds. While calculating the bond equivalent yield can be difficult, most modern spreadsheets have BEY calculators built-in that can aid.