• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Calculate Bond-Equivalent Yield of Annual-Pay Bonds

CFA® Exam Level 1, Fixed Income Securities

This lesson is part 8 of 18 in the course Yield Measures, Spot Rates, and Forward Rates

In the US, most bonds are generally semi-annual coupon paying bonds, so we calculate the semi-annual yield and then calculate the bond-equivalent yield (annualized) by simply doubling the semi-annual yield. This is done when the bonds have semi-annual coupon payments.

However, not all bonds pay semi-annual coupon, especially there are many non-US bonds that pay coupon annually and hence will have the annual yield that is calculated by the compounding rules.

The bond-equivalent yield of a semi-annual coupon bond and the annual yield from an annual-pay bond cannot be directly compared. To make them comparable, we need to convert the annual yield from the annual-pay bond into bond equivalent yield, which is done using the following formula:

BEY of annual-pay bond = 2 x [(1+ yield on annual-pay bond)0.5 -1]

What the above formula does is first calculates the semi-annual yield and then applies the convention of doubling it to arrive at the bond equivalent yield.

Let’s take an example. Let say that an annual coupon paying bond has a yield of 6.5%. The bond-equivalent yield will be calculated as follows:

BEY = 2*(1.065^0.5 – 1) = 6.398%

Note that BEY will always be lesser than the effective annual yield or the YTM of annual pay bond because BEY doesn’t consider the effect of compounding.

Alternatively you could also convert the BEY of a semi-annual pay bond into YTM on annual-pay basis by using the formula:

YTM on annual-pay basis = (1+BEY/2)2 – 1

So, if BEY is 6%, then YTM on annual-pay basis will be:

YTM (annual-pay basis) = (1+6%/2)^2 – 1 = 6.09%

Again note that YTM on annual pay basis is more than Bond-equivalent Yield.

Previous Lesson

‹ Factors Affecting Reinvestment Risk

Next Lesson

How to Calculate Yield to Call of a Bond ›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • Sources of Return from Investing in a Bond
  • How to Calculate Yield to Maturity
  • How to Calculate Current Yield
  • Bond Equivalent Yield Convention
  • Yield to Maturity (YTM) Approximation Formula
  • YTM and Reinvestment Risk
  • Factors Affecting Reinvestment Risk
  • Calculate Bond-Equivalent Yield of Annual-Pay Bonds
  • How to Calculate Yield to Call of a Bond
  • Cash Flow Yield
  • Bootstrapping Spot Rate Curve (Zero Curve)
  • How to Price a Bond Using Spot Rates (Zero Curve)
  • Nominal Spread
  • Z-Spread: Definition and Calculation
  • Option-adjusted Spreads (OAS)
  • What are Forward Rates?
  • How to Calculate Forward Rates from Spot Rates?
  • How to Value a Bond Using Forward Rates

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us