Lesson 5 of 5 · 13 min

Bond equivalent yield: comparing money market instruments

To compare short-term instruments fairly, restate every quote as a bond equivalent yield (a 365-day add-on rate), and convert periodicity when comparing with bond yields.

In short

A bond equivalent yield (BEY), or investment yield, is a money market rate stated as an add-on rate on a 365-day year.
From a discount rate: (1) price it with $PV = FV(1 - \frac{Days}{Year} DR)$ ; (2) $BEY = \frac{365}{Days} \times \frac{FV - PV}{PV}$ .
From an add-on rate on a 360-day year: $BEY = AOR \times 365/360$ . A 365-day add-on rate already is a BEY.
Only compare instruments (and their spreads over T-bills) on the same BEY basis: the highest quoted rate is not always the highest return.
To compare with semiannual bond yields, convert periodicity: $(1 + \frac{BEY}{Year/Days})^{Year/Days} = (1 + \frac{APR_2}{2})^2$ .

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