Answers the Question
What is a standardized measure of a bond's annual return?
Calculator for Bond Equivalent Yield
What Is the Bond Equivalent Yield?
This formula standardizes the measures of return for bonds so that they can be compared in a consistent manner.
Why Is it Important?
- Different bonds require different lengths of time to mature, either because of factors relating to their issuance or because they were purchased on the secondary market from other investors.
- Investors need some means to understand the relative value of each potential bond investment so that they can identify those offering the highest returns for a given period of time.
Formula(s) to Calculate Bond Equivalent Yield
- BOND EQUIVALENT YIELD = ((PAR VALUE - PRICE) / PRICE) * (365 / DAYS UNTIL MATURITY) * 100
- This method is not appropriate for investments that have returns other than at the end of the investment period. Many investments (including some bonds) pay in increments over their lifetimes.
- This method does not take into account future expectations of interest risks. In times of falling interest rates, for instance, it may prove prudent to take on bonds with relatively low yearly interest rates in exchange for longer periods of time to maturity.
- This method does not factor in the risk of default. In general, bonds with longer time horizons and higher promised rates of return feature greater levels of risk.
- This method does not consider the ease of resale of the bonds, should the need arise. Some bonds may be mispriced by the market and therefore require extensive discounting or even allow for premium pricing.