## DEFINITION of 'Bank Discount Basis'

Bank discount basis, also known as discount yield, is a convention used by financial institutions when quoting prices for fixed-income securities sold at a discount, such as municipal and U.S. Treasury bills. The quote is presented as a percentage of face value, and is determined by discounting the bond by using a 360-day-count convention, which assumes there are twelve 30-day months in a year.

Next Up

## BREAKING DOWN 'Bank Discount Basis'

The bank discount basis shows as an annualized yield, stated as a percentage. It is the return on investment generated by purchasing the investment at a discount and then selling it par when the bond matures. Treasury bills, along with many forms of corporate commercial paper and municipal notes, are issued at a discount from par value — the face value. U.S. Treasury bills have a maximum maturity of six months (26 weeks), while Treasury notes and bonds have longer maturity dates.

While the 30/360 day-count convention is the standard banks use when quoting government treasury bonds, the bank discount rate will be lower than the actual yield you receive on your short-term money market investment – because there are 365 days in a year. The rate should, therefore, not be used as an exact measurement of the yield that will be received. Over longer maturities, the day count convention will have a greater impact on the current 'price' of a bond than if the time to maturity is much shorter.

To convert a 360-day yield to a 365-day yield, simply "gross up" the 360-day yield by the factor 365/360. A 360-day yield of 8% would equate to an 8.11% yield based on a 365-day year.

8% * (365 / 360) = 8.11%

For more on comparing bond yields, read How to compare the yields of different bonds.

## How To Calculate The Bank Discount Rate

The bank discount basis, or bank discount rate, is calculated using the following formula:

Bank discount rate = (Discount from par value / par value) * (360 / days to maturity)

= ((par value – purchase price) / par value) * (360 / days to maturity)

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% 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. Bonds with a coupon can also be quoted at on a yield basis.

RELATED TERMS
1. ### Day-Count Convention

A day-count convention is a system used to determine the number ...
2. ### Discount Yield

Discount yield is a measure of a bond's percentage return, frequently ...
3. ### Discounting

Discounting is the process of determining the present value of ...
4. ### Discount Bond

A discount bond is a bond that is issued for less than its par ...
5. ### Discount Note

A discount note is a short-term debt obligation issued at a discount ...
6. ### Market Discount

The market discount is the difference between a bond's stated ...
Related Articles
1. Investing

### Understanding Bond Prices and Yields

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

### Beginner's Guide To Trading Fixed Income

Beginner's Guide To Trading Fixed Income
3. Investing

### Common interview questions for fixed-income traders

Discover a list of potential questions and answers commonly asked in job interviews for a candidate applying for a position as a fixed-income trader.
4. Investing

### How Bond Market Pricing Works

Want to know how bond price are determined? Learn the basic rule of the bond market.
5. Investing

### The Cost of Shale Oil Versus Conventional Oil

Fracking technology has brought new costs to the oil extraction process, and that has an impact on the profitability of the deposits being drilled.
6. Investing

### Fixed-income trader: job description and salary

Understand what kind of skills, necessary licenses, and daily activities are needed as the requirements and find out what the average salary of a fixed income trader.
RELATED FAQS
1. ### What's the Difference Between FHA and Conventional Loans?

Conventional mortgages require higher credit scores than FHA mortgages. Read Answer >>
2. ### How can I calculate the carrying value of a bond?

Learn what the carrying value of a bond means, how it can change, and the easiest way to calculate a bond's carrying value ... Read Answer >>

Hot Definitions
1. ### Socially Responsible Investment - SRI

Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...

The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
3. ### Futures Contract

An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
4. ### Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
5. ### Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
6. ### Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...