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Bond equivalent yield (BEY)

A convention that restates a yield on a semi-annual compounding basis so instruments with different payment frequencies can be compared fairly.

US bonds pay twice a year, so their yields are quoted on a semi-annual basis. A treasury-bill pays no coupon and is quoted on a discount basis, and many European bonds pay annually. Comparing them raw gives the wrong answer.

Bond equivalent yield is the bridge. Converting an annual-pay yield to semi-annual: BEY = 2 x ((1 + annual yield)^0.5 - 1). The semi-annual number is always slightly lower than the annual one for the same true return.

Example: a European bond yields 5.00% annually. Its bond equivalent yield is 2 x ((1.05)^0.5 - 1) = 4.94%. Quoting 5.00% against a US bond at 4.97% would make the European bond look better than it is.

Related: yield-to-maturity, current-yield

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