Yield basis: Difference between revisions

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A basis of quoting the return on an instrument by reference to its current value (rather than by reference to its terminal value).
A basis of quoting the return on an instrument by reference to its current value (rather than by reference to its terminal value).


For example when an instrument is quoted - on a <u>yield basis</u>, one period before its maturity - at a yield of 10% per period, this means that it is currently trading at a price of 100% DIVIDED BY [1 + 10% = 1.10] = 90.91% of its terminal value.
 
<span style="color:#4B0082">'''Example: Yield basis calculation'''</span>
 
When an instrument is quoted - on a <u>yield basis</u>, one period before its maturity - at a yield of 10% per period, this means that it is currently trading at a price of 100% DIVIDED BY (1 + 10% = 1.10) = 90.91% of its terminal value, to the nearest 0.01%.
 


(The periodic ''discount rate'' on this instrument is 100% LESS 90.91% = 9.09%.  So if the same instrument had been quoted on a <u>discount basis</u>, then the quoted discount rate per period = 9.09%.)
(The periodic ''discount rate'' on this instrument is 100% LESS 90.91% = 9.09%.  So if the same instrument had been quoted on a <u>discount basis</u>, then the quoted discount rate per period = 9.09%.)


The relationship between the periodic yield (r) and the periodic discount rate (d) is:
The relationship between the periodic yield (r) and the periodic discount rate (d) is:
d = r/[1+r]
 
d = r/(1+r)
 


So in this case:
So in this case:
d = 0.10/[1 + 0.10 = 1.10]
 
= 9.09%
d = 0.10/(1 + 0.10)
 
= 0.10/1.10
 
= 9.09% (to the nearest 0.01%)
 


== See also ==
== See also ==
* [[Discount basis]]
* [[Discount basis]]
* [[Effective annual rate]]
* [[Nominal annual rate]]
* [[Periodic yield]]


[[Category:Financial_products_and_markets]]

Latest revision as of 20:27, 27 June 2022

A basis of quoting the return on an instrument by reference to its current value (rather than by reference to its terminal value).


Example: Yield basis calculation

When an instrument is quoted - on a yield basis, one period before its maturity - at a yield of 10% per period, this means that it is currently trading at a price of 100% DIVIDED BY (1 + 10% = 1.10) = 90.91% of its terminal value, to the nearest 0.01%.


(The periodic discount rate on this instrument is 100% LESS 90.91% = 9.09%. So if the same instrument had been quoted on a discount basis, then the quoted discount rate per period = 9.09%.)


The relationship between the periodic yield (r) and the periodic discount rate (d) is:

d = r/(1+r)


So in this case:

d = 0.10/(1 + 0.10)

= 0.10/1.10

= 9.09% (to the nearest 0.01%)


See also