Bond Equivalent Yield Formula

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Formula to Calculate Bond Equivalent Yield (BEY)

The formula is used to calculate the bond equivalent yield by ascertaining the difference between the bond nominal or face value and its purchase price; these results must be divided by its price, and these results must be further multiplied by 365 and then divided by the remaining days left until the maturity date.

An investor needs to know the bond equivalent yield formula. It allows the investor to calculate the annual yield of a bond sold at a discount.

Bond Equivalent Yield Formula = (Face value – Purchase Price) / Purchase Price * 365/d

Bond Equivalent Yield Formula

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Source: Bond Equivalent Yield Formula (wallstreetmojo.com)

Here, d = days to maturity

Example

You can download this Bond Equivalent Yield Excel Template here – Bond Equivalent Yield Excel Template

Mr. Yamsi is confused about two bonds he is considering for investments. One bond offers $100 per bond as a purchase price, and another offers $90 per bond. Both fixed-income securities would offer $110 per bond after six months (for the first) and 12 months (for the second). Which one should Mr. Yamsi invest in?

This is a classic case of being confused between two fixed-income securities.

However, we can easily find the BEY to see which investment is more fruitful for Mr. Yamsi.

For the first bond, here’s the calculation –

Bond Equivalent Yield = (Face Value – Purchase Price) / Purchase Price * 365 / d

  • Or, BEY = ($110 – $100) / $100 * 365 / 180
  • Or, BEY = $10 / $100 * 2.03
  • Or, BEY = 0.10 * 2.03 = 20.3%.

Now, let’s calculate the BEY for the second bond.

BEY = (Face Value – Purchase Price) / Purchase Price * 365 / d

  • Or, BEY = ($110 – $90) / $90 * 365 / 365
  • Or, BEY = $20 / $90 * 1 = 22.22%.

By calculating the BEY for both of these bonds, we can easily say that Mr. Yamsi should invest in the second bond.

However, if time becomes a factor, Mr. Yamsi may choose the first bond because it is six months. It is offering a staggering 20.3% return.

Interpretation

If you look closely, you will see two parts of this formula for bond equivalent yield.

Use and Relevance

As an investor, you have many options. When you have so many options, you would only choose the option which will provide you with the most return.

That’s why you need to use the bond equivalent yield formula to determine whether a particular investment is better or worse than the other investments.

However, to calculate the bond equivalent yield, you must remember that these investments don’t offer annual payments. And you can use this formula for fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more securities. For example, if you find out about a bond offering a discount on the purchase price, first be sure to find the bond equivalent yield and then go ahead (if you want to).

Bond Equivalent Yield Calculator

You can use the following Bond Equivalent Yield Calculator

Face Value
Purchase Price
d
Bond Equivalent Yield Formula =
 

Bond Equivalent Yield Formula =
Face Value - Purchase Price 365
X
Purchase Price d
00 365
X= 0
0 0

Bond Equivalent Yield in Excel (with excel template)

Let us now do the same example above in Excel. This is very simple. You need to calculate BEY for both of these bonds.

You can easily calculate the BEY in the template provided.

Bond Equivalent Yield Formula in excel

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This has been a guide to Bond Equivalent Yield (BEY) Formula. Here we learn how to calculate bond equivalent yield using its formula, practical examples, and excel templates. You may also learn more about fixed income with these articles below –