Coupon Equivalent Yield - CEY
James Bond takes $15,000 he picked off the body of a supervillain and invested it into short-term…bonds.
The bonds that James Bond bought will mature in 60 days and pay a 4% interest rate. It's short-term, because James Bond doesn’t know if he’s going to be alive in three months, or if he's going to, uh...Die Another Day.
Though the face value sits at $15,000, he buys the bond for $13,500. So, he asks himself a question. He knows that the bonds he bought have a 4% coupon. But what would that bonds pay if the payment were to compound for a year? That annual return on investment calculation produces the Coupon Equivalent Yield.
To calculate the CEY, we’re going to need to do some advanced elementary school math. We're going to divide the amount of interest paid between the date James Bond bought the bond...and the time that his bond matures. We’ll multiply that quotient by the number of days in a year (365) multiplied by the number of days left to maturity. Since we don’t need any “Please Excuse My Dear Aunt Sally,” we can just do the math easily.
In this case:
(Interest of $600 / Purchase price of $13,500) times (365/60) = 27.0%
Not bad, Mr. Bond.
It’s completely hypothetical. But it does offer a person a benchmark to which they can compare the opportunity costs and benefits against other investments.
Related or Semi-related Video
Finance: What is a zero coupon bond?15 Views
Finance allah shmoop What is a zero coupon bond After
all this time our hero remains zero Yeah dude all
right well there was a whole song about him and
your parentsgeneration Just ask him The coupon on a bond
is its dividend or yield payment also known as the
rent paid by the corporation or government or individual who's
Borrowing that money sofa bond has zero coupon Does that
mean the rental of that capital is free Uh no
not at all Isiro coupon bond with par value of
a thousand might sell initially for say seven hundred twenty
dollars iy a big discount to that grand the bonds
interest is on ly paid cumulatively at the very end
when the person who loaned the seven hundred twenty dollars
gets his grand back that's it it's a one time
payment of a thousand bucks so many years later like
a decade of that bond yielding a bit over three
point three percent if you did the math of compounding
well this is what it would look like Note that
the amount owed at the end of the year is
mohr than what was owed the previous year and that
the interest is charged than on that amount Well in
real life these calculations are done twice a year with
bonds that is every six months the interest rates are
charged Zero coupon bonds yield notably more than normal bonds
which pay interests every six months Why Why With zero
coupon bonds yield mohr risk in paying some interest at
least some each six month period Well the bondholders getting
something back along the way and over time the interest
payments can be More than the principal loaned itself So
with zero coupon bonds Well there's Just a one time
payment at the very end So you'd better hope the
person showing you that money doesn't You know just decide
to skip town a week before the principal and interest
combined Or do speaking of which i've got a flight 00:02:00.288 --> [endTime] to catch No
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