Hey all! I would like to know how can I differentiate between the two formulas that are stated in the books for Bond Equivalent Yield. One formula is about 2 * semiannual discount rate (QM Study Session 2) and the other is the AOR on a 365-day base (FI Study Session 15). I did some search in the forum and there was no clarification regarding this issue. Any thoughts? Thanks!
Twice the effective semiannual yield is the standard definition of BEY.
The add-on yield definition’s just weird.
Hah, well, the same answer that I was getting in other posts.
Thanks S2000magician!
My pleasure.
I’m pretty sure that if you called that add-on yield thing BEY at PIMCO, you’d be fired on the spot.
My understanding is that the two formulas are different ways of arriving at the same conclusion. On level 1 the first formula is used in QM the second in Fixed Income. For me, the information given in the question determined what formula to use.
For exam purposes, just remember that for:
QM: BEY = 2 × semiannual YTM or 4 × quarterly YTM or …
CF & FI: BEY = (Discount/Price)×(365/days to maturity)
Don’t remember that BEY = 4 × quarterly YTM.
That’s completely wrong.