Discount basis and Official Bank Rate: Difference between pages

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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).
1. ''UK.''


The official reference interest rate for the UK determined by the Bank of England's Monetary Policy Committee (MPC).


<span style="color:#4B0082">'''Example: Discount basis calculation'''</span>
The Official Bank Rate is the rate used for certain key transactions between the Bank of England ('the Bank') and financial institutions.


An instrument is quoted - on a <u>discount basis</u>, one period before its maturity - at a discount of 10% per period.
It is designed to have the effect of determining the level of near risk-free interest rates throughout the UK financial sector.


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%.)
It is used by many financial institutions when setting interest rates for certain of their products.




The relationship between the periodic discount rate (d) and the periodic yield (r) is:
The Official Bank Rate is often known - externally to the Bank - as the 'Bank of England Base Rate' (BBR).


r = d / (1 - d)
Within the Bank of England, it is often abbreviated to 'the Bank Rate'.


So in this case:


r = 0.10 / (1 - 0.10)
2. ''International.''


r = 0.10 / 0.90
Similar interest rates in other jurisdictions.


= 11.11%


== See also ==
* [[Bank of England]]
* [[Bank Rate]]
* [[Base rate]]
* [[Inflation target]]
* [[Jurisdiction]]
* [[Monetary Policy Committee]]  (MPC)
* [[MLR]]
* [[Reference rate]]
* [[Term Funding Scheme]]


== See also ==
* [[Discount]]
* [[Discount instruments]]
* [[Discount rate]]
* [[Effective annual rate]]
* [[Nominal annual rate]]
* [[Periodic discount rate]]
* [[Periodic yield]]
* [[Sterling commercial paper]]
* [[US commercial paper]]
* [[Yield basis]]


==External link==
*[https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate The Bank Rate - Bank of England]
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:Corporate_finance]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Long_term_funding]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Cash_management]]
[[Category:Financial_products_and_markets]]
[[Category:Liquidity_management]]

Latest revision as of 00:26, 27 January 2022

1. UK.

The official reference interest rate for the UK determined by the Bank of England's Monetary Policy Committee (MPC).

The Official Bank Rate is the rate used for certain key transactions between the Bank of England ('the Bank') and financial institutions.

It is designed to have the effect of determining the level of near risk-free interest rates throughout the UK financial sector.


It is used by many financial institutions when setting interest rates for certain of their products.


The Official Bank Rate is often known - externally to the Bank - as the 'Bank of England Base Rate' (BBR).

Within the Bank of England, it is often abbreviated to 'the Bank Rate'.


2. International.

Similar interest rates in other jurisdictions.


See also


External link

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