Bond yield equivalent

CFA Level I Fixed Income
#1

hi all,

i cant get my head around why we would ever use the Bond yield equivalent when it ignores compounding? wouldn’t the effective annual rate always be best to compare short term bonds?

thanks

#2

First, it’s bond equivalent yield (BEY), not bond yield equivalent.

Second, we use it because most bonds pay coupons semiannually, where the semiannual coupon payment is simply half of the annual coupon rate times the par value; thus, a par bond paying semiannual coupons will have a YTM equal to its coupon rate.

#3

many thanks