Bond Equivalent Yield (BEY)

Bond Equivalent Yield (BEY)

What it is

Bond Equivalent Yield (BEY) annualizes the return on a discounted (zero‑coupon or discount) security so it can be directly compared with the annual yields of coupon‑paying bonds. It converts the price discount into an annual rate based on days to maturity.

Why it matters

• Allows apples‑to‑apples comparison between short‑term discount instruments (e.g., Treasury bills, zero‑coupon bonds) and traditional coupon bonds.
• Useful for investors evaluating short‑term, discounted securities against longer‑term fixed‑income options.

Formula

BEY = [(Face Value − Purchase Price) / Purchase Price] × (365 / Days to Maturity)

This is a simple (non‑compounded) annualization of the holding‑period return.

Step‑by‑step example

1. Identify values: Face value = $1,000; Purchase price = $900; Days to maturity = 182.5.
2. Calculate return: $1,000 − $900 = $100.
3. Return on investment: $100 / $900 = 0.111111 (11.1111%).
4. Annualize: 11.1111% × (365 / 182.5 = 2) = 22.2222% → BEY ≈ 22.22%.

Practical notes and limitations

• BEY uses simple interest annualization and does not reflect compounding; it differs from effective annual yield or yield to maturity (YTM) when compounding matters.
• Commonly used for Treasury bills and other discount instruments; use caution when comparing across instruments with different compounding conventions.
• Many spreadsheet packages and financial calculators include functions or templates to compute BEY to avoid manual errors.

Key takeaways

• BEY converts discounted‑security returns into an annual yield for direct comparison with coupon bonds.
• It is a simple annualization method and does not account for compounding.
• Use BEY to compare short‑term discount instruments with longer‑term bond yields, but be mindful of differing yield conventions.