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)-10. This yield is an internal rate of return with semi-annual compounding. How do we annualize it?
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 bond-equivalent yield (BEY).
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:
|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?
|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 - ICONV|
NOM = 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.|