Bond Equivalent Yield??

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hks_3854

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Plz help me understand concept of Bond Equivalent Yield...


"Bond equivalent yield = 2*Semiannual Discount Rate"

Is semiannual discount rate EAY, HPY or Money mkt yield??

Also, not able to comprehend example in Schweser ( Reading 6, page 149) :

Q: The EAY on an investment is 8%. What is the yield on a Bond equivalent basis?
 
I think.... you would have to take the effective annual yield and converted back to semi-annual

(1.08)^0.5 - 1 =0.0392 , now that you have it as a semi-annual yield all you have to do is multiply it by 2 to get the bond equivalent yield (7.85%).

I hope I'm right.
 
I think the concept of the bond equivalent yield is......

you want to state yields as annual yields....... so an effective annual yield.... has been compounded to account for (semi, quarterly, monthly) payments.... right??

We have to get this effective yield back to what the semi-annual (non-effective yield, per say) would be... once you have that.... you can simply x 2 to get the annual yield...

so a bond that pays annually (7.85%) is equivalent to a semi annual bond that pays 8%

I hope I am right... :)
 
hks_3854 Wrote:
> Q: The EAY on an investment is 8%. What is the
> yield on a Bond equivalent basis?

(1+r/2)^2 = 1+8% -> 1+r/2 = (1+8%)^.5 -> r = 7.85% //agree with dudeinthecity
 
and the other way around

EAY = (BEY/2)^2

Dude,

an 8% BEY is equivalent to an 8.16% EAY

MDD
 
Man i'm confused now....

isn't the effective yield always GREATER than the annual yield...... due to compounding...??

is this incorrect????

"so a bond that pays annually (7.85%) is equivalent to a semi annual bond that pays 8% "
 
This is how I would solve it as well


hks_3854 Wrote:
-------------------------------------------------------
> Plz help me understand concept of Bond Equivalent
> Yield...
>
>
> "Bond equivalent yield = 2*Semiannual Discount
> Rate"
>
> Is semiannual discount rate EAY, HPY or Money mkt
> yield??
>
> Also, not able to comprehend example in Schweser (
> Reading 6, page 149) :
>
> Q: The EAY on an investment is 8%. What is the
> yield on a Bond equivalent basis?
 
EAY = (1 + BEY/2) ^ 2 - 1
or EAY = (1 + BEY/f) ^ f -1 where factor f = 365/DM(date to maturity)
EAY > BEY
 
Sorry, my formula was totally Fd

EAY = (1+BEY/2)^2
BEY = (SQRT(EAY) - 1) * 2

EAY > BEY because of compounding

Hyang,

I'm still working on FI so perhaps I haven't gotten to this factor part but it doesn't seem to make any sense. If there were 365 days to maturity , the EAY would be 1 no matter what the BEY was.
 
Sometimes the yields listed for short-term discount instruments have simply been annualized without compounding the interest.

This uncompounded annual interest rate is simply called the annual interest rate to distinguish it from the effective annual yield, but, most often, it is called the bond equivalent yield (BEY) (aka investment rate yield, equivalent coupon yield).


BEY = Interest Rate per Term x Number of Terms per Year



BEY = Face Value - Price Paid / Price paid X Actual Number of Days in Year /Days Till Maturity
 
chasinggoats Wrote:
-------------------------------------------------------
> BEY = (SQRT(EAY) - 1) * 2

BEY = (SQRT(1+EAY) - 1) * 2
 
chasinggoats Wrote:
-------------------------------------------------------
> Sorry, my formula was totally Fd
>
> EAY = (1+BEY/2)^2
> BEY = (SQRT(EAY) - 1) * 2
>
> EAY > BEY because of compounding
>
> Hyang,
>
> I'm still working on FI so perhaps I haven't
> gotten to this factor part but it doesn't seem to
> make any sense. If there were 365 days to maturity
> , the EAY would be 1 no matter what the BEY was.

******************************************************

EAY = (1+BEY/2)^2 -1
 
Thank you all for inputs and appologies for disappearing after starting the thread.
What i understnd frm abv discussion is....(correct me if m wrong)

"BEY is simply uncompounded annual interest rate which actually is annualized HPY.

Hence, BEY = Face Value - Price Paid / Price paid X Actual Number of Days in Year /Days Till Maturity.

Also formulas "EAY = (1 + BEY/2) ^ 2 - 1" & "BEY = (SQRT(1+EAY) - 1) * 2" make sense.

However Schweser has another question on same concept which again is confusing me...
Q: # A 3 months loan has HPY of 2%.what is BEY?
In this question schweser is actually calculating EAY in the answr. Isn't solutions to both question contradictory?
 
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