Bank Discount Basis
Contents
Demystifying Bank Discount Basis: A Comprehensive Guide
Bank discount basis, also known as discount yield, serves as a critical convention in the realm of fixed-income securities. This article aims to elucidate the intricacies of bank discount basis, its calculation, and its significance in the financial landscape.
Deciphering Bank Discount Basis
Bank discount basis entails the quoting of prices for fixed-income securities, such as Treasury bills, at a discount from their face value. Employing a 360-day-count convention, financial institutions express the quote as a percentage of face value, facilitating transactions in the bond market.
Understanding the Calculation
The bank discount rate, or basis, is computed using a formula that considers the discount from the par value, the par value itself, and the number of days to maturity. This calculation enables investors to gauge the expected return on investment from purchasing securities at a discount and holding them until maturity.
Differentiating Discount Yield and Bond Accretion
Discount yield differs from bond accretion, another method used in bond valuation. While discount yield pertains to securities sold at a discount, bond accretion involves gradually incorporating the discount amount into bond income over the remaining life of the bond. Understanding these distinctions is pivotal for investors navigating the bond market.