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Bond Equivalent Yield (BEY) is a useful tool for examining the returns of discounted bonds, which do not pay out regular interest payments (known as coupons) like traditional bonds. In the absence of coupons, the BEY formula helps investors compare the return of a discounted bond with traditional fixed-income securities by approximating annual yields.
The BEY formula was first developed in the 1950s by Donald Warner. It is calculated by taking the price gain or loss of a discounted bond over time and dividing it by the bond’s face value. The result is then multiplied by the number of days in a year (of which there are 365) and the result is expressed as a percentage.
For example, if someone bought a discounted bond for $950 and sold it for $990 after 180 days, the BEY would be calculated as follows:
BEY = [($990 — $950) / $950] * (365/180) * 100
BEY = 4.86%
In this example, the investor would receive 4.86% in yield over the course of the 180 days, or approximately 2.43% on an annual basis.
By using the BEY formula, investors can accurately compare returns on traditional bonds and those of a discounted bond over the same period. The formula isn’t without its drawbacks, however. It takes no account of reinvestment risk or any expenses associated with the bond, so it should not be used as a platform for making investment decisions.
Ultimately, the Bond Equivalent Yield (BEY) formula is a useful tool for investors looking to compare the returns of traditional and discounted bonds. By entering the necessary information into the formula, investors can calculate an approximate annual yield for discounted bonds, allowing for a more meaningful comparison between conventional and zero-coupon bonds. This can help investors make informed decisions about their investments and maximize their returns.
The BEY formula was first developed in the 1950s by Donald Warner. It is calculated by taking the price gain or loss of a discounted bond over time and dividing it by the bond’s face value. The result is then multiplied by the number of days in a year (of which there are 365) and the result is expressed as a percentage.
For example, if someone bought a discounted bond for $950 and sold it for $990 after 180 days, the BEY would be calculated as follows:
BEY = [($990 — $950) / $950] * (365/180) * 100
BEY = 4.86%
In this example, the investor would receive 4.86% in yield over the course of the 180 days, or approximately 2.43% on an annual basis.
By using the BEY formula, investors can accurately compare returns on traditional bonds and those of a discounted bond over the same period. The formula isn’t without its drawbacks, however. It takes no account of reinvestment risk or any expenses associated with the bond, so it should not be used as a platform for making investment decisions.
Ultimately, the Bond Equivalent Yield (BEY) formula is a useful tool for investors looking to compare the returns of traditional and discounted bonds. By entering the necessary information into the formula, investors can calculate an approximate annual yield for discounted bonds, allowing for a more meaningful comparison between conventional and zero-coupon bonds. This can help investors make informed decisions about their investments and maximize their returns.