Chapter-7
Fixed Income securities
Calculation of Yield on Treasury -bill
Bank Discount Yield(BDY):-
The bank discount yield is calculated to know about the annual discount rate at which the bill
has been sold from its face value.
The bank discount yield is calculated based on face value and annualized using 360 days in a year.
Par −Pur 360
Bank Discount yield (BYD)= x x 100
Par n
Par −Pur
Bank Discount yield for the period=
Par
Annual Equivalent Yield(AEY):-
To compare the return on investment in T- bill with other investment options,the annual
equivalent yield is calculated.
The annual equivalent yield is calculated based on purchase price and annualized using 365 days
in a year.
Par −Pur 365
Annual Equivalent Yied (AEY)= x x 100
Pur n
Holding Period Return(HPR):
Holding period return is the rate of return earned by the investor over the respective holding
period.
Par −Pur
Holding Period Return(HPR) )=
Pur
Effective Annual Yield (EAY):-
Calculation of effective annual yied takes into account the compounding effect and indicated the
growth rate on investment.
Effective Annual Yield (EAY)=( 1+ periodic rate)no of compounding perioid – 1
Effective Annual Yield (EAY)=( 1+ periodic HPR)m – 1
Eg
Consider a 180 days Rs 10,000 face value-T-bill issued today at Rs 9,[Link] the followings:
a. Bank Discount rate
b. Annual equivalent yield
c. HPR for 180 days
d. Effective annual rate
Ans-10%,10.67%,5.26%,10.80%
Quotation of Treasury Note:
Rate Maturity Bid Asked Change Ask
Yield
9 July 11n 109:03 109:05 +10 5.47
a. Rate: Rate means coupon rate of notes. In above example annual coupon rate of note is 9
percent.
b. Maturity: Maturity means maturity period of treasury notes. In above example maturity date of
note is July 2011.
c. Bid: The bid price indicates the selling price of note over the counter market (OTC). In above
03
example bid price (selling) price of the note is 109 % of par value which is equivalent to Rs
32
1090.93.
d. Asked : The asked price indicates that the purchase price of notes over the counter market
03
(OTC). In above example (purchase) price of the notes is 109 % par value, which is equivalent
32
to Rs 1091.56.
e. Change: Change means difference between previous days and quoted days bid price. In above
example change +10 means price increased by 10 percent than previous days. Change in
10
previous days and quoted day is % of par value, which is equivalent to Rs 3.12.
32
f. Asked Yield : Asked yield means annualized yield based on purchase price of security dealer. In
above example annual yield of note is 5.47%.
Quotation of Corporate Bond:
Bond Cur Vol. Close Net change
yld.
1 7.0 10 7 1
ATT 7 16 106 +
2 8 8
a. Bond: It indicates the ATT bond which has coupon rate of 7.5% and will be paid semiannually
and a maturity date of 2016.
b. Cur yld: It is current yield, defined as annual coupon income divided by price, is 7 % which is
different measure from yield to maturity.
c. Vol.: The vol given in above quotation refers the number of bond traded. In above quotation 10
bonds were traded.
d. Close: It indicates the closing price. In above quotation the closing price of bond was 106.875 %
of par, or 106.875 % of Rs 1000= Rs 1068.75.
e. Net change: It indicates the change in price from previous days close. Positive change indicates
increase in price and negative change indicates decrease in price.
Previous day’s close= Close – Net change
= 1068.75- 0.125% of Rs 1000
= 1067.5