Discount basis: Difference between revisions
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So in this case: | So in this case: | ||
r = 0.10/[1 - 0.10 = 0.90] | r = 0.10/[1 - 0.10 = 0.90] = 11.11% | ||
== See also == | == See also == | ||
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* [[US commercial paper]] | * [[US commercial paper]] | ||
* [[Yield basis]] | * [[Yield basis]] | ||
Revision as of 14:02, 28 May 2013
This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).
For example when 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%
