Fixed Income Mathematics

CHAPTER

9

Discount Yield

The previous chapters looked at the equations for compound interest and its

related topics: present value, annuity certain, bond price, and the future value

of an annuity. This chapter looks at discount yield and how to compute prices

using discount yield. It shows the equation for price, given discount yield and

some examples of securities traded using discount yield, especially United

States Treasury bills. It develops the equation for bond equivalent yield, and

shows why bond equivalent yield is important and where it is used.

United States Treasury bills (T-bills) are arguably the most important short-

term securities issued anywhere in the world, and possibly the most impor-

tant securities of any sort issued anywhere. You should know about T-bills,

how they are quoted, issued, and traded. You should understand how to

compare T-bill discount yields with the bond yield that we studied in the

first chapters of this book. We use T-bills as the example for discount yield

calculations.

When you finish this chapter, you should understand the definition of dis-

count yield, how to compute price from discount yield, the relation between

discount yield and bond equivalent yield, when and why you should use bond

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