Discount Yield

What Is the Discount Yield?

The discount yield is an approach to working out a bond's return when it is sold at a discount to its face value, communicated as a percentage. Discount yield is regularly used to work out the yield on municipal notes, commercial paper and treasury bills sold at a discount.

The Formula for Discount Yield Is:

Discount yield is calculated as and the formula utilizes a 30-day month and 360-day year to work on the calculation.

Understanding the Discount Yield

Discount yield figures a discount bond investor's return on investment (ROI) in the event that the bond is held until maturity. A Treasury bill is issued at a discount from par value (face amount), alongside 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.

On the off chance that a security is sold before the maturity date, the rate of return earned by the investor is unique, and the new rate of return depends on the sale price of the security. If, for instance, the $1,000 corporate bond purchased for $920 is sold for $1,100 five years after the purchase date, the investor has a gain on the sale. The investor must determine the amount of the bond discount that is posted to income before the sale and must compare that with the $1,100 sale price to work out the gain.

A zero-coupon bond is a one more illustration of a discount bond. Contingent upon the period of time until maturity, zero-coupon bonds can be issued at significant discounts to par, some of the time 20% or more. Since a bond will constantly pay its full, face value, at maturity — expecting no credit occasions happen — zero-coupon bonds will consistently rise in price as the maturity date draws near. These bonds don't make periodic interest payments and will just make one payment of the face value to the holder at maturity.

Model

Expect, for instance, that an investor purchases a $10,000 Treasury bill at a $300 discount from par value (a price of $9,700), and that the security develops in 120 days. In this case, the discount yield is ($300 discount)[/$10,000 par value] * 360/120 days to maturity, or a 9% dividend yield.

The Differences Between Discount Yield and Accretion

Protections that are sold at a discount utilize the discount yield to compute the investor's rate of return, and this method is not the same as bond accretion. Bonds that utilization bond accretion can be issued a par value, at a discount or a premium, and accretion is utilized to move the discount amount into bond income over the leftover life of the bond.

Expect, for instance, that an investor purchases a $1,000 corporate bond for $920, and the bond develops in 10 years. Since the investor gets $1,000 at maturity, the $80 discount is bond income to the owner, alongside 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 utilize a straight-line method or the effective interest rate method. Straight-line posts a similar dollar amount into bond income every year, and the effective interest rate method utilizes a more complex formula to compute the bond income amount.

Features

• Discount yield is figured utilizing a normalized 30-day month and 360-day year.
• This calculation is normally utilized for assessing Treasury bills and zero-coupon bonds.
• Discount yield processes the expected return of a bond purchased at a discount and held until maturity.