What is Bond Equivalent Yield (BEY)?
Bond Equivalent Yield (BEY) converts the yield of a loan or security with any payment frequency into the equivalent yield of a semi-annual bond. This standardization allows direct comparison between whole loans (which typically pay monthly) and bonds (which typically pay semi-annually). BEY is calculated by solving for the discount rate that equates the present value of projected cashflows to the purchase price, then converting to a semi-annual equivalent. It is the primary yield metric used in whole loan trading.
Formula
BEY = 2 × [(1 + monthly yield)^6 - 1] Or solved iteratively: Price = Sum of [CF(t) / (1 + BEY/2)^(t/6)] for all months t
How LoanBook Uses Bond Equivalent Yield
LoanBook calculates BEY using the central verified-portfolio-calculations engine with full monthly cashflow projection including CPR, CDR, and loss severity assumptions. BEY is the primary yield displayed in portfolio analytics, the SBA trading portal, and CU participation pricing.
Frequently Asked Questions
How is BEY different from a simple yield calculation?
BEY accounts for the timing of all projected cashflows, including scheduled principal, prepayments, defaults, and losses, and converts the result to a semi-annual equivalent. A simple yield divides annual income by price and ignores cashflow timing.
Why is BEY used instead of IRR for whole loans?
BEY is the market convention for whole loan trading because it provides a direct comparison to the bond market. While IRR and BEY are mathematically related, BEY's semi-annual convention matches how fixed income traders think about relative value.
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