DEFINITION of 'Yield Basis'

The yield basis is a method of quoting the price of a fixed-income security as a yield percentage, rather than as a dollar value. This allows bonds with varying characteristics to be easily compared.


Unlike stocks, which are quoted in dollars, most bonds are quoted with a yield basis. For example, assume a company is listed with a 6.75% coupon rate and is set to mature 10 years from the date of issuance. The $1,000 par bond is trading at a dollar value of 940.00.

The yield basis can be calculated using the current yield formula presented as: Coupon / Purchase Price

Following our example above, the coupon to be paid annually is 6.75% x $1,000 = $67.50. Therefore, the yield basis is $67.50 / $940 = 0.0718, or 7.18%. The bond will be quoted to investors as having a yield basis of 7.18%. The yield quote tells a bond trader that the bond is currently trading at a discount because its yield basis is greater than its coupon rate (6.75%). If the yield basis is less than the coupon rate, this would indicates that the bond is trading at a premium since a higher coupon rate increases the value of the bond in the markets. A bond trader could then compare the bond to others within a certain industry.

The yield basis of a pure discount instrument can be calculated using the bank discount yield formula, which is:

r = (Discount / Par Value) x (360/t)

where r = annualized yield

discount = Par value minus Purchase price

t = time left to maturity

360 = bank convention for the number of days in a year

Unlike the current yield, the bank discount yield takes the discount value from par and expresses it as a fraction of the par value, not the current price, of the bond. This method of calculating the yield basis assumes simple interest, that is, no compounding effect is factored in. Treasury bills are quoted only on bank discount basis.

For example, assume a Treasury bill with a $1,000 face value is selling for $970. If its time to maturity is 180 days, the yield basis will be:

r = [($1,000 - $970)/$1,000] x (360/180)

r = ($30/$1,000) x 2

r = 0.06, or 6%

As Treasury bills pay no coupon, the bondholder will earn a dollar return equal to the discount if the bond is held until it matures.

  1. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  2. Running Yield

    Running yield is the annual income on an investment divided by ...
  3. Current Yield

    Current yield is the annual income (interest or dividends) divided ...
  4. Bond

    A bond is a fixed income investment in which an investor loans ...
  5. Bond Quote

    A bond quote is the price at which a bond is trading, typically ...
  6. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
Related Articles
  1. Investing

    Understanding Bond Prices and Yields

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

    4 Basic Things to Know About Bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  3. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

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

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  5. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  6. 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.
  7. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  1. What causes a bond's price to rise?

    Should you invest into bonds? Learn about factors that influence the price of a bond, such as interest rate changes, credit ... Read Answer >>
  2. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center