my question regarding these rate measures is simple. when is each used and why?!!
HPY we all know that it is a measure of return for a period in which you hold an asset/portfolio etc … which is good to be used when you want to avoid the timing of the investment’s cash flows. ie you buy a stock now…and then u sell 10 days later
MMY annualizes HPY?but then again EAY does the same?!
for BEY i can see that it is HPY*(365/DTM) …and i have seen it also 2*[(1+YTM)^0.5-1] for semiannual…which bring the same result?!
am i correct so far? and what are the other rates used for?
different yield measures are used for different asset types. It would make more sense if they are used the same day count, interest periods, etc., but they don’t…
so, BDY is used to measure treasury bills yields: BDY= $ discount / Face value * Days/ 360. This measure does not capture capital gains / discount on purchase.
HPY is the simple return over the period, disregarding the time period. HPY = New value/ Old value - 1.
MMY annualises the HPY with a 360 day count per year. This is often used for interbank short term loans. MMY = HPY * Days / 360.
EAY annualises the HPY with a 365 day count per year. This is often used for bonds that pay a fixed coupon. EAY = (1 + HPY)^Days / 365 - 1.
YTM is the annualised yield over the life of an asset.
BEY is the semi-annual yield * 2. It is used for semi-annual treasuries. It is 2*[(1+YTM)^0.5-1].
(apologies if i get any of this wrong. I am still learning myself!)
the questions become difficult when asked to convert between different measures