Discount basis: Difference between revisions

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'''For example:'''  
'''Example'''  


when an instrument is quoted - on a <u>discount basis</u>, one period before its maturity - at a discount of 10% per period,
An instrument is quoted - on a <u>discount basis</u>, 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.
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 <u>yield basis</u>, then the quoted yield per period = 11.11%.)
(The periodic ''yield'' on this instrument is 10% / 90% = 11.11%.  So if the same instrument had been quoted on a <u>yield basis</u>, then the quoted yield per period = 11.11%.)

Revision as of 13:11, 15 March 2015

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