bank-discount basis

Discount Yield

A way to quote the price for bonds. It is calculated as the annualized yield assuming a 360 day year. One calculates the discount yield thusly:

Discount yield = (Discount from par value / par value) * (360 / Days until maturity)

The discount yield is also called the discount basis or the bank-discount basis.

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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.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.