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). | ||
<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/ | |||
d = r/(1+r) | |||
So in this case: | So in this case: | ||
d = 0.10/ | |||
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%)
