bank-discount basis

bank-discount basis

A method of calculating the quoted yield on a debt security. In a bank-discount basis calculation, the amount of discount from face value is divided by the security's face value and the result is annualized. For example, a $10,000 face-amount bond due in two months and selling for $9,900 would be quoted at ( ^$100/_$10,000 ) ( ³⁶⁰/₆₀ ), or 6%. While this is a common way of quoting yields on certain securities such as Treasury bills and commercial paper, it actually understates the effective rate paid. Also called discount basis, discount yield. See also equivalent bond yield.