Bond Equivalent Yield (BEY)

The bond equivalent yield (BEY) is a measure of the annual return on an investment, taking into account the effects of compounding and the frequency of interest payments. It is calculated by multiplying the interest rate by the number of times per year it is compounded, and then dividing by the number of days in a year.

For example, if an investment pays 5% interest, compounded quarterly, the BEY would be 5.06%. This is because 5% compounded quarterly is equal to 5 / 4 * (1 + (5 / 100))4 = 5.06%.

The BEY is often used to compare the returns on different investments, as it allows for a consistent comparison across investments with different compounding frequencies. It is also used to calculate the present value of an investment, as the BEY can be used to determine the annual interest rate that would be required to produce a given future value.

The BEY is not without its limitations. One limitation is that it does not take into account the risk of the investment. Another limitation is that it does not take into account the tax implications of the investment.

Despite these limitations, the BEY is a useful tool for comparing the returns on different investments and for calculating the present value of an investment.