What it is:
How it works (Example):
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.