Bond Equivalent Yield equivalent, difference, article, between

kseniaru

Forummates - Good Morning.
I came across an article where I found an example related to Bond Equivalent Yield. My problem is I am not getting the concept stright - about the difference between BEY, YTM and when to use which one.
It appeared that even though the Bond has a coupon rate of 7% that matures in 8 years, the yield to maturity for that bond (on bond equivalent basis is 8%). What is BE basis here?

jbaldyga

Any BEY of X%/year just means an actual rate of (X/2)% per 6 months or ((1 + X/200)^2 - 1) * 100% per year.
In your example, the bond is not selling at par (at 100). It is selling at a lower price while paying $7 per $100 face value per year (or $3.50 per 6 months.) That’s why its yield to maturity is 8% i.e. 4% per 6 months.
Don’t think of coupon rate as an interest rate, but rather as a payment stream of $3.50 per 6 months for 8*2 = 16 periods. In your financial calculator, input N = 16, I = 4 (for BEY of 8%), FV = 100, PMT = 3.50 and see what it says is the PV. That is what the bond is selling for (the “lower price” I said earlier.)