Discount basis: Difference between revisions
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This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate). | This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate). | ||
(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%.) | <span style="color:#4B0082">'''Example: Discount basis calculation'''</span> | ||
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. | |||
(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 relationship between the periodic discount rate (d) and the periodic yield (r) is: | The relationship between the periodic discount rate (d) and the periodic yield (r) is: | ||
r = d/ | |||
r = d / (1 - d) | |||
So in this case: | So in this case: | ||
r = 0.10/ | |||
r = 0.10 / (1 - 0.10) | |||
r = 0.10 / 0.90 | |||
= 11.11% | |||
== See also == | == See also == | ||
* [[Discount]] | |||
* [[Discount instruments]] | * [[Discount instruments]] | ||
* [[Discount rate]] | * [[Discount rate]] | ||
* [[Effective annual rate]] | |||
* [[Nominal annual rate]] | |||
* [[Periodic discount rate]] | |||
* [[Periodic yield]] | |||
* [[Sterling commercial paper]] | * [[Sterling commercial paper]] | ||
* [[US commercial paper]] | * [[US commercial paper]] | ||
* [[Yield basis]] | * [[Yield basis]] | ||
[[Category:Corporate_finance]] | |||
Latest revision as of 00:02, 7 July 2022
This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).
Example: Discount basis calculation
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)
r = 0.10 / 0.90
= 11.11%
