The yield on a discount bond that is computed in the same way the yield on a coupon bond is calculated. This indicates the annual yield on a short-term fixed income security or product that is typically quoted on a bank-discount basis so that the yield can be comparable with quotations on coupon-bearing securities. The formula of equivalent bond yield (EBY) is:
For example, if a 10%, 90-day T-bill with a part value of $1,000 is selling for $970, the equivalent bond yield would be:
EBY= ($30/$970) x (365/90)= 12.54%
It is also referred to as a coupon-equivalent rate.
