Yield basis: Difference between revisions
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imported>Doug Williamson (Spacing.) |
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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. | ||
(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] | d = 0.10/[1 + 0.10 = 1.10] | ||
Revision as of 19:47, 2 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.
(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 = 1.10]
= 9.09%
