What Is an Annual Equivalent Rate?

In order to facilitate direct comparison with bond yields, the yields of money market financial products such as Treasury bills are converted into annual yields, which are called bond equivalent yields. Treasury bills in the United States, for example, have maturities of less than one year and do not pay interest before maturity. The price is therefore expressed in a discounted manner below par value. Without conversion calculations, the level of income cannot be directly compared with longer-term public debt.

Bond equivalent yield

Investors may pay 9,852 yuan to buy 91-day short-term government bonds with a face value of 10,000. Upon maturity, the investor will receive a payment of 10,000 yuan with a total interest of 148 yuan. Short-term Treasury bonds have no coupon rate, so the bond equivalent yield is:

(148 ÷ 9852) × (365 ÷ 91) = 6.025% ^[1]