Discount basis: Difference between revisions
From ACT Wiki
Jump to navigationJump to search
imported>Doug Williamson (Updated entry. Source ACT Glossary of terms) |
imported>Doug Williamson (Align presentation of formula with qualification material) |
||
| Line 1: | Line 1: | ||
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%.) | '''For example:''' | ||
when 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 = 0.90 ) | ||
= 11.11% | = 11.11% | ||
Revision as of 15:37, 14 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).
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%
