Coupon Equivalent Yield (CEY)

The effective annual interest rate paid on a bond is known as the coupon equivalent yield or CEY. On Treasury bills and corporate bonds with maturities of less than one year, it is used to measure an annualized yield that does not account for compounding. CEY permits financial backers to look at the profit from, say a 60-day Treasury bill to one-year coupon-paying security, or another comparable security that pays a yearly yield. CEY stands for nominal yield and should not be confused with EY, which takes compounding into account.

The formula for coupon equivalent yield (CEY) is:

(Interest Paid, in Dollars, Between Now and Maturity / Purchase Price) × (365 / Days to Maturity) × 100

The coupon equivalent yield (CEY), also called bond equivalent yield, is a basic rate of interest that accounts for the bond’s discounted purchase price. CEY permits financial backers to look at the profit from, say a 60-day Treasury bill to a one-year coupon-paying security, or another comparative security that pays a yearly yield. The coupon equivalent yield can be used by investors to determine which investment has the best annualized return.

Borrowers usually pay interest more than once a year, and bond fees are no exception: a standard coupon bond pays interest every six months. Investors, on the other hand, have the option of reinvesting their payments, increasing their return on investment. The coupon equivalent yield assists financial backers with figuring what the profit from a momentary Treasury bill would have been, had they had the option to gather a similar pace of revenue for an entire year.

Commercial paper and other short-term corporate bonds are also subject to a coupon equivalent yield estimate for some investors. This requires a slightly different calculation, as follows:

CEY = (Interest payment ÷ Current price) × (365÷ days to maturity)

The coupon equivalent yield actually assists the investor in determining how much higher the return is or would have been. An effective annual yield, which takes compounding into account, is not to be confused with the coupon equivalent. Since the coupon equivalent yield is a nominal yield, no compounding is used.

In any case, note that the equation accepts the financial backer can reinvest those premium installments at a rate equivalent to the security’s coupon rate. This isn’t generally conceivable, contingent upon winning business sector rates and the financial backer’s monetary objectives. As a consequence, when opposed to an efficient annual yield, it provides a more conservative estimate of yield. The above is commonly used in commercials for short-term investment returns because compounding improves the appearance of the return.

Information Sources:

  1. investinganswers.com
  2. investopedia.com