Periodic bond yields for both straight and zero-coupon bonds are conventionally computed based on semi-annual periods, as U.S. bonds typically make two coupon payments per year. For example, a zero-coupon bond with a maturity of five years will mature in 10 6-month periods. The periodic yield for that bond, r, is indicated by the equation Price = Maturity value x (1 + r)

The convention is to double it and call the result the bond's yield to maturity. This method ignores the effect of compounding semi-annual YTM, and the YTM calculated in this way is called a

However, yields of a semi-annual-pay and an annual-pay bond cannot be compared directly without conversion. This conversion can be done in one of the two ways:

- Convert the bond-equivalent yield of a semi-annual-pay bond to an annual-pay bond.
- Convert the equivalent annual yield of an annual-pay bond to a bond-equivalent yield.

- A Eurobond pays coupon annually. It has an annual-pay YTM of 8%.
- A U.S. corporate bond pays coupon semi-annually. It has a bond equivalent YTM of 7.8%.
- Which bond is more attractive, if all other factors are equal?

- Convert the U.S. corporate bond's bond equivalent yield to an annual-pay yield:
- Annual-pay yield = [1 + 0.078/2]
^{2}- 1 = 7.95% < 8% - The Eurobond is more attractive since it offers a higher annual-pay yield.

- Convert the Eurobond's annual-pay yield to a bond equivalent yield (BEY):
- BEY = 2 x [(1 + 0.08)
^{0.5}- 1] = 7.85% > 7.8% - The Eurobond is more attractive since it offers a higher bond equivalent yield.

achu: BEY is a defn made for convenience by bankers, but using basic principles we can convert it to true annual/periodic yields |

meghanchloe: The explanation here is so much easier to understand than the book. |

mad123: Could someone explain the conversion from normal YTM to BEY? and is semi-annual BEY= Annual BEY/2?Is there a logic to the above formula that I cant read through? Thanks. |

nwarrior: To save time you could just use the ICONV Feature on the BAII+, and convert from nominal to effective. |

bidisha: nwarrior: can u show how to do the above example on baII |

nerhusbae: 2nd - ICONVNOM = BEY ANNUAL PAY YIELD = EFF C/Y = 2 (semi-annual compounds per year) |

NBlanco: anyone know if there is a similar feature on the HP12c that nerhusbae is describing? |

federer: please all note that @ nerhusbae comment only works to convert semi-annual pay bond to annual pay, doesnt work the other way around. |

Safiya921: No explanation of the Money Market Yield here. |

931129: Read & Understand on a fresh brain. |