What is investment yield?

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 Yield_T-Bill = [(F − P)/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 Yield_T-Bond = [r + [(F − P)/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:

BEY_EAY = [(1 + EAY)^0.5 – 1] x 2