Discount Yield
Candlefocus EditorDiscount Yield is the most efficient way to compute the bond's rate of return when purchased at a discount. It is calculated by subtracting the bond's present value (usually the initial purchase price with any accrued interest) from its face value and dividing that total by the bond's face value. The sum is then multiplied by 360 and then divided by the number of days to maturity.
For example, if a Treasury bill has a face value of $10,000 and was purchased for $9,500, the investor immediately earns a $500 return. Details of the Discount Yield calculation would look like this: $500 ÷ $10,000 x 360 ÷ 90 days = 16.7%.
Understanding and calculating Discount Yield allows investors to determine the expected rate of return for a bond that was purchased at a discount. It also allows them to more accurately project the profitability from the investment and use it to compare to other investments that have various yield options. It is important to note, however, that the yield is only based on the amount paid at the time of the purchase and is only relevant if the bond is held through its maturity.
In addition, Discount Yield may be difficult to accurately predict when it comes to certain markets with higher-than-average volatility such as foreign exchange or stock markets. Because of this, it is important to understand the market that an investor is dealing with, as this can be a key factor in calculating the yield.
Overall, Discount Yield is a useful way to gauge the expected return on an investment when it is purchased at a discount. Utilizing a standardized month and year in its calculation allows investors to more accurately predict the yield from their bond investments. As with any purchase, however, it is important to understand the market and the investment itself in order to correctly factor in any risks when calculating the Discount Yield.