What Is the Discount Yield?

The discount yield is a way of calculating a bond's return when it is sold at a discount to its face value, expressed as a percentage. Discount yield is commonly used to calculate the yield on municipal notes, commercial paper and treasury bills sold 澳洲幸运5官方开奖结果体彩网:at a discount.

The Formula for Discount Yield Is:

ꦛDiscount yield is calculated as and the formula uses a 30-day month and 360-day year to simplify the calculaඣtion.

Understanding the Discount Yield

Discount yield computes a 澳洲幸运5官方开奖结果体彩网:discount bond investor's 澳洲幸运5官方开奖结果体彩网:return on investment (ROI) if the bond is held until maturity. A 澳洲幸运5官方开奖结果体彩网:Treasury bill is issued at a discount from 澳洲幸运5官方开奖结果体彩网:par value (face amount), along with many forms of commercial paper and municipal notes, which are short-term debt💞 instruments issued by municipalities. U.S. Treasury bills have a maximum maturity of six months (26 weeks), while Treasury notes and bonds have longer maturity dates.

If a security is sold before the 澳洲幸运5官方开奖结果体彩网:maturity date, the rate of return earned by the investor is different, and the new rate of return is based on the sale price of the security. If, for example, the $1,000 corporate bond purchased for $920 is sold for $1,100 five years after the purchase date, the in🎶vestor has a gain on the sale. The investor must determine the amount of the bond discount that is posted to income bꦡefore the sale and must compare that with the $1,100 sale price to calculate the gain.

A 澳洲幸运5官方开奖结果体彩网:zero-coupon bond is a another example of a discount bond. Depending🍷 on the length of time until maturity, zero-coupon bonds can be issued at substantial discounts to par, sometimes 20% or more. Because a bond will always pay its full, face value, at maturity—assuming no credit events occur—zero-coupon bonds will steadily rise in price as the maturity date approaches. These bonds don't make periodic interest payments and will only make one payment of the face value to the holder at maturity.

Example

Assume, for example, that an investor purchases a $10,0🌌00 Treasury bill at a $300 discount from par value (a price of $9,700), and that the security matures in 120 days. In this case, the discount yield is ($300 discount)[/$10,000 par value] * 360/120 days to maturity, or a 9% div💃idend yield.

The Differences Between Discoun🦹t Yield and Accretion

澳洲幸运5官方开奖结果体彩网:Securities that are sold a🐼t a discount use the discount yield to calculate the investor's rate of return, and this method is different than 澳洲幸运5官方开奖结果体彩网:bond accretion. ๊Bonds that use bond accretion can be issued a par value, at a discount or a premium, and accretion is used to move the discount amount into bond income over the remaining life of 𓂃the bond.

Assume, for example, that an investor purchases a $1,000 corporate bond for $920, and the bond matures in 10 years. Since the investor receives $1,0💯00 at maturity, the $80 discount is bond income to the owner, along with interest earned on the bond. Bond accretion means that the $80 discount is 🔥posted to bond income over the 10-year life, and an investor can use a straight-line method or the effective interest rate method. Straight-line posts the same dollar amount into bond income each year, and the effective interest rate method uses a more complex formula to calculate the bond income amount.