Yield Basis
Candlefocus EditorThe yield basis method provides the bond trader with some helpful insights into the worth of a bond investment. In particular, it helps the trader to identify whether a bond is being traded at a discount or premium which allows them to make an informed decision about the purchase of the bond.
The yield basis method also helps the bond buyer to consider the cost of the entire investment taking into account the broker's markup or profit. When a bond is purchased on a net yield basis, it factors in the brokerage fee, indicating how much the yield is once these costs are taken out.
To ensure accuracy when using the yield basis method to compare bonds, it is important to ensure that the bonds being compared have similar characteristics. This is particularly important when comparing different bonds from different issuers.
In conclusion, the yield basis method is a helpful tool for bond traders that aids in understanding the cost of a bond investment. It helps traders to easily compare the characteristics of various bonds before purchasing and also ensures that the cost of the investment is fairly taken into account.