Competence

This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).

Example

An instrument is quoted - on a discount basis, one period before its maturity - at a discount of 10% per period.

This means that it is currently trading at a price of 100% LESS 10% = 90% of its terminal value.

(The periodic yield on this instrument is 10% / 90% = 11.11%. So if the same instrument had been quoted on a yield basis, then the quoted yield per period = 11.11%.)

The relationship between the periodic discount rate (d) and the periodic yield (r) is:

r = d / ( 1 - d )

So in this case:

r = 0.10 / ( 1 - 0.10 = 0.90 )

= 11.11%

See also

• Discount instruments
• Discount rate
• Sterling commercial paper
• US commercial paper
• Yield basis
• Effective annual rate
• Nominal annual rate
• Periodic discount rate
• Periodic yield