Final answer:
The effective annual rate (EAR) typically will be greater than the bond equivalent yield (BEY) for the same security, as EAR accounts for the effects of compounding, unlike the BEY.
Step-by-step explanation:
In comparing the effective annual rate (EAR) with the bond equivalent yield (BEY) of the same security, we must understand how they are calculated. The effective annual rate takes into account the effects of compounding, meaning it shows what the actual annual interest will be if the bond interest is reinvested at the same rate during the year. The bond equivalent yield, on the other hand, is a calculation that annualizes the yield based on the purchase price and ignores compounding. Therefore, it typically does not show the full earning potential over a year compared to EAR which does.
Based on this difference, assuming everything else equal, the effective annual rate will generally be greater than the bond equivalent yield for the same security because the EAR reflects the additional earning potential due to compounding.