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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