Discount Window Facility and Discount basis: Difference between pages

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''Bank of England - Sterling Monetary Framework - liquidity insurance.''
This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).


(DWF).
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 Bank of England's Discount Window Facility (DWF) is one of three key components of the liquidity insurance part its Sterling Monetary Framework (SMF).
(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 DWF is designed for institution-specific stresses needing liquidity of tailored amounts and timing, with time-lagged disclosure to the market.
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%


The DWF's key features are:
== See also ==
*Initiated on demand by the participating institution.
* [[Discount instruments]]
*Rollable 30-day term for banks and similar institutions, and five-day for central counterparties.
* [[Discount rate]]
*Usually gilts lent against less liquid but high credit quality collateral.
* [[Sterling commercial paper]]
*Prices based on collateral type and size of drawing.
* [[US commercial paper]]
* [[Yield basis]]


Disclosure of an institution's use of the DWF risks worsening the original stress which caused the need to use it.
For this reason, disclosure of uses of the DWF is time-lagged and averaged across participating institutions and over a calendar quarter.
The intention is that any drawing under the DWF should have ended before data on it are published.
The other two key facilities in the Bank's liquidity insurance structure are the Contingent Term Repo Facility (CTRF) and the Bank's Indexed Long-Term Repo (ILTR) operations.
==See also==
*[[Bank of England]]
*[[Central counterparty]]
*[[Collateral]]
*[[Collateral transformation]]
*[[Contingent Term Repo Facility]]
*[[Gilts]]
*[[Indexed Long-Term Repo operations]]
*[[Lender of last resort]]
*[[Liquidity]]
*[[Liquidity insurance]]
*[[Official Bank Rate]]
*[[Operational Standing Facilities]]
*[[Regulation]]
*[[Repo]]
*[[Reserves]]
*[[Sterling Monetary Framework]]
*[[Stress]]
*[[Tailor]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:Financial_products_and_markets]]

Revision as of 14:19, 23 October 2012

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%

See also


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