Discount basis: Difference between revisions
From ACT Wiki
Jump to navigationJump to search
imported>Doug Williamson (Link with Periodic discount rate page.) |
imported>Doug Williamson (Standardise headings with examples) |
||
| Line 2: | Line 2: | ||
'''Example''' | <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. | An instrument is quoted - on a <u>discount basis</u>, one period before its maturity - at a discount of 10% per period. | ||
Revision as of 12:40, 2 December 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: 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 = 0.90 )
= 11.11%
