BEY - Quant/Bond vs Corp Fin 365, security, following, equivalent

spartan1

===============
Boyle Inc just purchased a banker's acceptance for $25,400. It will mature in 80 days for $26,500. The discount-basis yeild and the bond equivalent yield for this security are closest to:

Discount-basis Bond equivalent
A. 18.7% 18.7%
B. 18.7% 19.8%
C. 4.2% 19.8%

ANS:
B.
===============

The answer is correct using the following formula for BEY: HPY x (365/days). This formula is for calculating yields on short-term investments (as stated in the Corp Fin readings).

However, using the old Quant/Bond formula by first calculating the semiannaul EAY and multiplying it by 2 gives 20.3%. The difference between the two answers is significant.

Are we supposed to use the previous formula only when asked to calculate yields on short-term investments and the use the latter for the rest? Why can't the Quant/Bond BEY formula be used to calculate the yields on short term investments?

thisisbrianly

> Are we supposed to use the previous formula only
> when asked to calculate yields on short-term
> investments and the use the latter for the rest?

Yes.

> Why can't the Quant/Bond BEY formula be used to
> calculate the yields on short term investments?

I really don't know.

Flok

I tough the multiplication was HPY x 360/days, how did you know you had to use 365... first time I see 365 instead of 360.

What did you do to get the BEY... did you do (1+ DBY)^.5-1x2???

Ionutzakis

It's HPY x 365/days to maturity