The bond equivalent yield is essentially a restating of the yield on a debt instrument, taking into consideration several factors that are involved regarding the interest on the asset. Bond equivalent yields are produced as a means of creating a means of comparison to an interest bearing coupon security.
The basic detail that is required to initiate the process of determining the bond equivalent yield is fairly straightforward. The purchase price per one thousand shares is divided into the purchase price. That figure is multiplied by a figure that represents the number of days until maturity divided by the number of days in the period under consideration. The time period can be monthly, quarterly, semi-annually, or annually.
It is important to note that in order for the bond equivalent yield that is determined with this formula must be compared to a security that has the same time period as well. As an example, if the bond equivalent yield is calculated using a time period of one year, then the security used for comparison must also be annual in nature. However, it should be noted that the formula for a bond equivalent yield does make it possible to compare fixed income securities whose payments are not annual with a security that does have an annual yield. This would require the one additional step of adding all payments received within the one year period in order to create a comparison that is uniform in nature.
The purpose of employing a bond equivalent yield to a given coupon security is to draw conclusions about the performance level of the debt instrument. Essentially, doing the comparison will help an investor to know if the amount of resources that have been invested in the debt instrument is likely to provide enough interest income to make the effort worthwhile. Should the comparison indicate that the debt instrument is not providing a return that is somewhat in line with what a different interest bearing investment would yield, the investor may choose to sell off interest in the debt instrument. At that juncture, the investor can choose to take the proceeds from the sale and reinvest the funds into a venture that will prove more profitable.
