Corporate bond equivalents compare the yield of corporate bonds, typically by comparing the rate of return on bonds that provide interest payments semiannually and annually. The process requires similar initial investments and consideration of interest rates and payment schedules. Refinements include considering small differences in initial investments and finding an average of interest rates.
Corporate bond equivalents are calculations that deal with the comparative yield associated with a corporate bond. The usual process is to compare the rate of return on a bond that provides interest payments semiannually to the rate of return on a bond that provides interest payments annually. Using a basic formula to convert the two different rates of return into similar amounts of interest earned over the same period can help the bondholder understand which bonds are producing the highest return on the money invested.
In most cases, the corporate bond equivalent process requires that the initial investment in each of the two bonds considered be the same or very similar. This helps simplify the process of comparing the rate of return earned from each bond. When the initial investment is the same amount, the focus shifts to the interest rate associated with each of the corporate bonds and the schedule for paying that interest.
Many types of bonds provide interest payments on an annual or semi-annual basis. When attempting to determine the existing corporate bond equivalent between two given corporate bonds, it is necessary to ensure that the same time period is used for the comparison. For example, if Bond A provides interest payments on a semi-annual basis while Bond B provides interest payments on an annual basis, the simplest way to get a quick, rough corporate bond equivalent is to add the two payments received in the same calendar year for Bond A to the single payment received for Bond B during the same year. While this is not a full corporate bond equivalent, it represents a figure that will suffice in most situations.
There are additional factors that can be addressed and allow the calculation of the corporate bond equivalent to be further refined. Taking into account the small differences in the initial investment in each of the two bonds is a consideration. Trying to find an average of the two interest rates can also be used as part of the comparison strategy. However, these factors are generally reserved for situations where bond yields are projected before a purchase is made. When looking for a rough comparison between bonds already purchased, the corporate bond equivalent is most commonly a simple reconciliation between the frequency of interest payments issued and the actual yield received for a quoted period.
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