Equivalent Bond Yield

Equivalent Bond Yield

A computed rate of return for a wager that might not always pay off is known as the Bond Equivalent Yield, or BEY. It is often confused with the interest rate on the coupon of a debt instrument. This makes it possible to contrast assets with various payoff frequencies.  

What Is the BEY? 

BEY is a statistic that enables traders to determine the yearly percentage rate of return on fixed-come assets, regardless of whether they are reduced short-term investments which only pay back on a periodic, semiannual, or monthly schedule. 

Traders can contrast the return on equity of these assets with what happens with conventional bond investments, which have maturities of at least a year and provide yearly yields because they have BEY numbers at their disposal. As a result, investors are better equipped to make decisions when building their entire fixed-income investments. 

Understanding BEY 

It is incredibly crucial that one comprehends the fundamentals of securities as a whole and the way they vary from equities in order to fully comprehend how the debt-comparable yield calculation works. 

Organisations that need capital are able to issue debt or shares. Stocks, which are given to shareholders in the shape of ordinary shares, offer a bigger return possibility than treasuries yet carry greater hazards than bonds. In particular, if a corporation declares insolvency and then eliminates all of its property, its shareholders will be the first to get any money. Investors only receive compensation provided there are resources left over. 

However, even if a business is financially sound, its revenue could still fall below projections. This can lower the value of stocks and result in losses for investors. However, no matter whether or not it is successful, that same corporation is required by law to repay its obligation to creditors. 

BEY Formula 

It is times dividing the variance among the amount payable on the bond and the cost of buying it by the amount paid for it. The total amount of days before the bond’s due date, “d,” is subsequently removed from the result after being multiplied by 365. 

Importance of BEY 

Buyers can compare their return on investment to those from traditional bonds using the BEY formula, and they can also get a general indication of how much a lower-yielding bond could cost each year. 

The production ratio% is important since it informs investors about how much of the raw material to actually order, how little of it will be usable after manufacturing, and how little the final product will actually cost for each dollar invested. 

High-yield bonds for companies are another asset class that equity investors frequently use to bolster their investment portfolios. The reason for this is that since these kinds of bonds are less susceptible to changes in rates of return, they broaden portfolios of investments for beneficial securities, lower total risk, and boost consistency. 

Example of BEY 

Consider a shareholder who pays US$900 for US$1000 zero-coupon paper and anticipates receiving the whole amount in a period of six months. The shareholder in this scenario would receive US$100. BEY is calculated by taking the principal amount of the bond (par) and then subtracting the price that was actually given for it: US$1000 – $900= US$100. 

Frequently Asked Questions

The annualised worth of steep discounting or zero-coupon shares is generally determined using the bond equivalent yield. Traders can use it to compare the yields of multiple bonds. Bond yield, which is calculated as a proportion of the bond’s nominal value, is the amount of profit a shareholder can anticipate receiving on what they invest in securities. It is crucial since it aids in the decision-making process for buyers and issuers with regard to potential investments alongside interest rates. 

A bond’s yearly yield or basis (or the yearly return of every other fixed-income product) without a yearly distribution can be calculated using a rate called the bond equivalent basis. In a nutshell, a bond equivalent basis aids in determining the “equivalent yield” of more than one treasury for investors. 

On dividing the disparity between the bond’s principal amount and the cost of buying it by the amount paid for it, the security’s equivalent return is computed.  

The equation is employed to determine the bond equivalent yield by determining the distinction between a bond’s small or face amount and the rate at which it was purchased. The outcome is then divided through the cost, multiplied by 365 in the year and finally divided by the number of days till the bond’s expiration date. 

The equation calculating bond equivalent yield must be known by a shareholder. It enables an owner to determine a bond’s yearly yield when it is discounted. 

The calculation for BEY on a financial calculator:  

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

The YTM, or yield to maturity, considers the impact of accumulating. Comparing a number of stable financial instruments with various durations is made easier for buyers by using the bond equivalent yield, which on the opposite side eliminates the impact of accumulating. 

The amount invested until maturity, which accounts for the combined capital and dividend returns, is the yearly rate of appreciation for a stake in bonds. 

This rate aids investors in calculating the yearly return of bonds or any other fixed-income product minus incorporating an annual dividend. In simple terms, BEY aids in determining the overall “equivalent yield” of more than one bond for investors. 

Instead of focusing on a bond’s intrinsic value, this metric looks at its present value. The amount of money that a buyer would anticipate making if they were to hold the bond over a year is represented by the current yield. 

    Read the Latest Market Journal

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 10 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 77 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 62 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 98 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 179 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 94 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 125 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Why 2024 Offers A Small Window of Opportunity and How to Position Yourself to Capture It

    Published on Mar 28, 2024 174 

    With the Federal Reserve (FED) finally indicating rate cuts in 2024, we witnessed a significant...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com