Yield basis: Difference between revisions
imported>Doug Williamson (Standardise calculations.) |
imported>Doug Williamson (Add notes about calculations to align with The Treasurer.) |
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<span style="color:#4B0082">'''Example: Yield basis calculation'''</span> | <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. | 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%. | ||
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= 0.10/1.10 | = 0.10/1.10 | ||
= 9.09% | = 9.09% (to the nearest 0.01%) | ||
Revision as of 21:12, 3 December 2015
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%)
