A Coupon Equivalent Yield (CEY) Calculator
The Coupon Equivalent Yield (CEY) is a calculation used to determine the yield on bonds that have maturities of less than one year. The CEY is used to measure the effective annual interest rate earned on a bond and the enables bond investors to compare the return on a 180-day Treasury bill to a one-year coupon paying bond.
What is a Coupon Bond?
Coupon bonds are bond issues that offer investors the benefit of receiving semi-annual interest payments. This payment schedule is more frequent than other types of bond issues which may pay on an annual or biannual basis. The face value of the coupon bond is paid in full back to the investor when the bond reached maturity.
Coupon bonds offer the investors a steady source of income, although the amount of interest varies by issuer. When considering investment in coupon bonds, important factors to bear in mind include:
• The amount of interest earned and when those payments are made
• The reliability of the borrower (issuer)
• The length of the loan
• The amount of the initial investment
The choice to invest in coupon bonds and the above components of that investment must be consistent with your investment objectives and risk tolerance.
How the Coupon Equivalent Yield is Calculated
The calculation for the coupon equivalent yield can be written as:
(Dollars of Interest Paid Between Now and Maturity / Purchase Price) * (365 / Number of Days to Maturity)
Search for Coupon Bonds
It is important to note that the CEY formula assumes the investor can reinvest interest payments at a rate that equals the coupon rate on the bond. This, of course, may not be possible as it is dependent upon current market rates.
A Coupon Equivalent Yield Example
Assume an investor has an opportunity to purchase a $1,000 bond today with a 5% coupon for $950. The issuer makes semi-annual interest payments and the bond is scheduled to mature in 60 days. Between now and maturity, the investor will receive half of one interest payment.
Given these factors, we can calculate the bond’s effective annual interest rate:
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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