Real quick question: Is add-on rate a synonym for bond equivalent yield? Or is it something different? Never stated outright (that I could find) in the readings. Thank you.
An add-on rate is not necessarily a BEY; it could be an EAY, for example.
The distinction is between an add-on rate and a discount rate. A 2% add-on rate means that you invest $100 to get $102; a 2% discount rate means that you invest $98 to get $100.
Thanks!
You’re welcome.
S2000magician,
The definitions of BEY for money market securities and capital market securities in CFA 2014 text are different and can be very confused.
Can you clarify ?
In Corporate Finance we see BEY defined as:
BEY = HPY × (365/t)
where t is the number of days over which the HPY is computed.
I don’t know whether short-term lenders (or corporate finance types) actually use this as their definition of BEY in practice, but it is at odds with the definition used in fixed income.
If you have to calculate BEY in a Corporate Finance question, use this definition; everywhere else, use the usual definition (BEY = 2 × semiannual effective yield).
Sorry.
Actually the definition of BEY for money market instruments in CFA 2014 text (Vol 5, Reading 54, P.424~426) is same as that in Corporate Finance. However, it seems that this definition is different from that in QM. Thus, I am very much confused !