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What is investment yield?

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Investment yield is the bond equivalent yield (BEY) measure of return used by the US Treasury to compare the yield on T-bills with bonds maturing on the same date, calculated as a percent of the T-bill’s purchase price on an actual/actual basis.  The discount yield on a T-bill is a percentage of its face value based on a 360-day year, while investment yield on a T-bill is restated in terms of its purchase price as follows, where F is face value, P the purchase price, and t the number of days to maturity:

Investment YieldT-Bill = [(FP)/P] x [365 or 366/t]

The investment yield on a T-bond or T-note held to maturity can be approximated with the following formula, where r is the nominal rate, F is face value, P is purchase price, and y is years to maturity:

Investment YieldT-Bond = [r + [(FP)/y]/[(F + P)/2]

To convert the effective annual yield (EAY) on an annual-pay bond (annual-pay YTM) to a bond equivalent yield for comparison with the semiannual-pay YTM of T-notes and T-bonds, the following equation is applied:

BEYEAY = [(1 + EAY)0.5 – 1] x 2

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