The BEY on the paper will be 6.37%.
The bond equivalent yield (BEY), in terms of finance, is a metric that enables investors to determine the annual percentage yield for fixed-income instruments, even if they are discounted short-term investments that only pay out on a monthly, quarterly, or semi-annual basis. This rate aids investors in calculating the annual yield of bonds (or any other fixed-income product) without an annual dividend. In other words, bond equivalent yield aids in determining the equivalent yield of two or more bonds for investors.
Investors can contrast the performance of these assets with that of conventional fixed income instruments that last for a year or more and generate yearly yields by using BEY numbers, which are readily available.
The formula of Bond Equivalent Yield is:
BEY=(( Par Value - Purchase Price ) ÷ ( Purchase Price )) × (365÷d)
Where,
d=Days to maturity on which the par value will be paid to the investor
Par value= price that will be paid on maturity of the bond.
Purchase price= price paid by the investor for acquiring the bond
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The complete question is mentioned below :
Suppose that $10 million face value commercial paper with a 270-day maturity is selling for $9.55 million. What is the BEY on the paper?
A. 4.71 percent
B. 6.42 percent
C. 6.37 percent
D. 6.28 percent
E. 4.50 percent
