Yield measures are used to evaluate the rate of return on bonds.

- They are typically annualized.
- Money market rates are simple interest rates and non-money market rates are compounded.

The periodicity of an annual interest rate is the number of periods in the year.

Consider a two-year, zero-coupon bond priced now at 88 per 100 of par value.

Note:

- The effective annual rate is the same.
- The bond equivalent yield and the periodicity are inversely related.
- When comparing different bonds, it is essential to compare the yields for the same periodicity to make a statement about relative value.

To convert an annual yield from one periodicity to another:

- A Eurobond pays coupons annually. It has an annual-pay YTM of 8%.
- A U.S. corporate bond pays coupons semi-annually. It has a bond equivalent YTM of 7.8%.
- Which bond is more attractive, if all else 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% - Therefore, 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% - Therefore, the Eurobond is more attractive since it offers a higher bond equivalent yield.

The

The

The standard YTM measure assumes that the bond will be held to maturity. It is not an appropriate yield measure for callable bonds, because they may be retired before maturity. For callable bonds a

Callable bonds typically have multiple call dates, each with its own call price. The

CHADZAMIRA: This is reasonably straight forward but be careful with the conversion process. |

ramtor: use the iconv function of BAII plus |

JimM: Using the ICONV function of BAII plus (it's on the "2" key), remember to set C/Y = 2, not 365.NOM = BEY EFF = Annual-pay yield Set 1 of those, CPT the other. |

jpducros: Remember that you'll always have :MMY<BEY<EAY MMY : Money Market Yield : no compounding - 360 d/year BEY : Bond Equiv. Yield : Semi-Annual Compounding - 365 d/y EAY : Effective annual Yield : compounding for the entire year, based on 365 d/y |

anaraguin: Thank you so so much JimM! :) |

moneyguy: That still doesn't tell me how to actually apply the iconv button to calculate this stuff, JimM |

2014: thanks jim |

tichas: Chadzamira , iwe |

SAB1987: Thank you JimM |

davidbenke: @moneyguyUS corporate bond example: [2nd][2] NOM = [7][.][8] C/Y = [2] EFF = [CPT] EFF should equal 7.952 |

philerup: TIL how to use ICONV. Thanks Jim! |

phill: why do them all have the same EAR and how is that calculated? |