Bond Equivalent Yield Convention

A common question asked by students is ‘Why have such a convention and why not instead use effective annual yield?’ The answer to this question is that since it’s a convention everybody uses it and therefore yields are comparable. It doesn’t really affect performance or comparison between bonds because everyone would have used the convention to quote the yield. Conventions are usually made to make things simpler. In this case if someone tells you that the bond-equivalent yield is 6%, you instantly know that semi-annual yield is 3%, which you can use to perform any calculations or to calculate the effective annual yield if you require it.

If the convention was to use effective annual yield, it may have been better, but does it really matter? In fact there are many other limitations of YTM that far outweigh the problem of BEY convention. So, my suggestion to you would be to just follow the convention and don’t fret over it. It is important however, that you use the convention correctly.