Hi All, I’m not clear on the underling difference between the Cash flow yield and Bond equivalent yield.
I know that the Cash flow yield is similar to the IRR of a bond, but my understand is that the YTM is also close to the IRR of a bond. Does this mean that the YTM and the Cashflow yield are basically the same thing? If so does this mean that the bond equivalent yield is something different? If so what separates the Bond Equivalent yield from the cashflow yield?
Thanks
Generally, the term cash flow yield is applied to bonds with embedded options, most commonly to MBSs, ABSs, and CMOs. It is a calculation that can be performed only ex post: after all of the cash flows are in, though people will calculate expected cash flow yield based on expected cash flows.
Cash flow yield is generally presented as a BEY, so that it can be compared to YTM, which is also presented as a BEY.
(Note: bond-equivalent yield (BEY) is not a specific yield (such as yield-to-maturity, or yield-to-call); it’s a convention for how yields are calculated and presented, just as effective annual yield (EAY) is. It’s like centimeters vs. inches: it’s a unit of measurement, not a measure of the size of anything in particular.)