Yield Basis
What It Is:
Yield basis refers to the act of quoting bond prices in terms of yield percentages rather than in dollars.
How It Works/Example:
Let's assume Company XYZ has $20,000,000 in bonds outstanding that pay 5% interest per year (or $50 per $1,000 bond). If the bonds are trading at $900 apiece, then the yield basis is:
$50/$900 = 0.0555 or 5.55%
Why It Matters:
Yield basis is useful for easily comparing bond characteristics. Though dollar prices are helpful, they don't take into account the other characteristics of a bond.
In particular, the yield basis indicates whether a bond is trading at a discount or a premium. If the yield basis is greater than the coupon rate, the bond is trading at a discount; if the yield basis is lower than the coupon rate, the bond is trading at a premium. Thus, bonds are generally quoted on yield basis, particularly Treasurys.
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Cached on May 22, 2012, 9:28 pm