How do you calculate bond equivalent yield of a bond knowing only the purchase price and face value?
example:
Price $49,414.72; Face value $50,000: duration 3 months:
The answer is: bond equivalent yield is 5.02% but how is it calculated? Even my financial advisor can only plug it into a computer program.
Answer:
I get 4.82% in the following way.
As 50000/49414.72 = 1.01184 the 3 month gain is 1.184%
To get the yield in a year take the fourth power
1..01184^4=1.0482 of 4.82% yield in a year
Math isn't my strong point but I think the rate is 4.738% equivalant.
I subtract $49414.72 (you Pay) from $50,000 (you get) and the profit is $585.28.since this is for 1/4 of the year...multiply $585.28 X 4 = $2,341.12 if it was for a year
take this $2,341.12 and devide it by your orginal investment $49,414.72 and multiply by 100 = 4.7377%
Hope this helps
50000=49414.72 e^r.3/12
rearranging and taking log on both sides,
r.3/12.log e = log(50000/49314.72)
Equivalent yield r =
= Log(50000/49314.72)x12/3=
=0.0552 = 5.52%
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