What is a Corporate Bond Equivalent?

Corporate bond equivalents are calculations that have to do with the comparative return associated with a corporate bond. The usual process is to compare the rate of return on a bond that offers interest payments on a semi-annual basis to the rate of return on a bond that provides interest payments on an annual basis. Using a basic formula to convert the two different rates of return into similar amounts of interest earned for the same period can help the bond holder to understand which bond is producing a higher return for the money invested.

In most cases, the corporate bond equivalent process requires that the initial investment in each of the two bonds under consideration be the same or very similar. This helps to simplify the process of comparing the rate of return earned from each bond. When the initial investment is the same amount, then the focus shifts to the rate of interest associated with each of the corporate bonds, and the schedule for the payment of that interest.

Many types of bonds provide interest payments on an annual or semi-annual basis. When attempting to determine the corporate bond equivalent existing between two given corporate bonds, it is necessary to make sure the same time period is used for 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 and 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 complete corporate bond equivalent, it does represent a figure that will suffice in most situations.

There are additional factors that may be addressed and allow the calculation of the corporate bond equivalent to be further refined. Making allowances for small differences in the initial investment in each of the two bonds is one consideration. Attempting to find an average of the two rates of interest may also be employed as part of the comparison strategy. However, these factors are usually reserved for situations where the return on bonds is being projected before a purchase is actually made. When looking for a rough comparison between bonds already purchased, the corporate bond equivalent more commonly is a simple reconciliation between the frequency of issued interest payments and the actual return received for a cited period.