What is ‘Yield Basis’
A way of expressing the price of a fixed-income asset as a yield percentage, rather than in dollars, is known as yield percentage pricing. This makes it possible to compare bonds with a variety of qualities quickly and effortlessly.
Explaining ‘Yield Basis’
Unlike stocks, which are priced in dollars, most bond quotations are expressed as a percentage of the bond’s yield. For example, the stock Corp. ZZZ is listed with a coupon of 6.75 percent and a maturity date of September 04/20. It has a dollar value of 94.00 and a yield of 9 percent.
When a bond trader sees this statement, he or she knows that the bond is now selling at a discount since the bond’s yield basis (9 percent) is higher than the bond’s coupon rate (6.75 percent ). A bond trader might then compare the bond to others in a certain industry to see how it compares.
Yield Basis FAQ
Is basis the same as yield to maturity?
The basis price of a fixed-income security is a method of referring to the price of a fixed-income security that is based on the yield to maturity of the security. The basis price implicitly implies that the investor will reinvest all interest payments and achieve a rate of return equal to the yield to maturity. The basis price is calculated using the yield to maturity.
Is the basis the current yield?
It is possible to realize the yield basis by expressing the price of a security or bond as a percentage yield. It is possible to determine the yield basis of a bond by dividing the coupon of the bond by the purchase price of the bond. In other words, the yield is calculated on the following basis: Coupon / Purchase Price (this is the current yield formula).
What is a discount yield basis?
This convention, also known as discount yield, is used by financial institutions to quote prices for fixed-income assets that have been offered at a discount, such as municipal bonds and U.S. Treasury bills, when they are sold at a discount.
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- The US Treasury yield curve: 1961 to the present – www.sciencedirect.com [PDF]