Coupon Equivalent Yield - CEY

James Bond takes $15,000 he picked off the body of a supervillain and invested it into short-term…bonds.

The bonds that James Bond bought will mature in 60 days and pay a 4% interest rate. It's short-term, because James Bond doesn’t know if he’s going to be alive in three months, or if he's going to, uh...Die Another Day.

Though the face value sits at $15,000, he buys the bond for $13,500. So, he asks himself a question. He knows that the bonds he bought have a 4% coupon. But what would that bonds pay if the payment were to compound for a year? That annual return on investment calculation produces the Coupon Equivalent Yield.

To calculate the CEY, we’re going to need to do some advanced elementary school math. We're going to divide the amount of interest paid between the date James Bond bought the bond...and the time that his bond matures. We’ll multiply that quotient by the number of days in a year (365) multiplied by the number of days left to maturity. Since we don’t need any “Please Excuse My Dear Aunt Sally,” we can just do the math easily.

In this case:

(Interest of $600 / Purchase price of $13,500) times (365/60) = 27.0%

Not bad, Mr. Bond.

It’s completely hypothetical. But it does offer a person a benchmark to which they can compare the opportunity costs and benefits against other investments.