What is the 'Discount Yield'

Discount yield is a measure of a bond's rate of return to an investor, stated as a percentage, and discount yield is used to calculate the yield on municipal notes, commercial paper and treasury bills sold at a discount. Discount yield is calculated as (par value - purchase price)[/par value] * 360/days to maturity, and the formula uses a 30-day month and 360-day year to simplify the calculation.

BREAKING DOWN 'Discount Yield'

Discount yield computes the investor's return on investment (ROI), which is generated by purchasing the investment at a discount, and by earning interest income. A Treasury bill is issued at a discount from par value (face amount), along with 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.

How To Calculate Discount Yield

Assume, for example, 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 matures 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

Securities that are sold at a discount use the discount yield to calculate the investor's rate of return, and this method is different than bond accretion. Bonds that use bond accretion can be issued a par value, at a discount or at a premium, and accretion is used to move the discount amount into bond income over the remaining life of the bond.

Assume, for example, that an investor purchases a $1,000 corporate bond for $920, and the bond matures in 10 years. Since the investor receives $1,000 at maturity, the $80 discount is bond income to the owner, along with the 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 use a straight-line method or the effective interest rate method. Straight-line posts the same dollar amount into bond income each year, and the effective interest rate method uses a more complex formula to calculate the bond income amount.

Factoring in a Security Sale

If a security is sold before the maturity date, the rate of return earned by the investor is different, and the new rate of return is based on the sale price of the security. If, for example, 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 calculate the gain.

RELATED TERMS
  1. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  2. Discount

    The condition of the price of a bond that is lower than par, ...
  3. Discount Note

    A short-term debt obligation issued at a discount to par. Discount ...
  4. Bond Discount

    The amount by which the market price of a bond is lower than ...
  5. Market Discount

    The difference between a bond's stated redemption price and its ...
  6. Bank Discount Rate

    The interest rate for short-term money-market instruments like ...
Related Articles
  1. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  2. Investing

    Calculating Bond Equivalent Yield

    The bond equivalent yield calculates the semi-annual, quarterly or monthly yield on a discount bond or note.
  3. Investing

    Explaining Original Issue Discount

    An original issue discount is the amount below par at which a bond or other debt instrument is issued.
  4. Investing

    4 Types Of Money Market Yields

    We give you four equations to help figure out the yields on your investments.
  5. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  6. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  7. Financial Advisor

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  8. Investing

    Taxation Rules for Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  9. Investing

    An Introduction to Individual Bonds

    Individual bonds are better than bond funds and can be a key component to one’s investment strategy.
RELATED FAQS
  1. How is the term 'accretive' used in fixed income investments?

    Find out how the word ''accretive'' can be used for fixed income investments that are issued at a discount, such as commercial ... Read Answer >>
  2. What types of fees apply to checking accounts?

    Learn about the difference between a bond's coupon rate and its yield to maturity, and how the par value, coupon rate and ... Read Answer >>
  3. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  4. What is the effective interest method of amortization?

    Find out more about the effective interest rate method and how the effective interest method is used to amortize a discounted ... Read Answer >>
  5. What is the difference between yield to maturity and the yield to call?

    Determining various the various yields that callable bonds can provide investors is an important factor in the bond purchasing ... Read Answer >>
Hot Definitions
  1. Current Assets

    A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
  2. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  4. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  6. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
Trading Center