What is a Discount Yield?

Discount yields are the amount of yield that is realized on securities that are sold at a discount. While a discount yield may apply to several different types of securities, the concept is most commonly associated with treasury bills. The idea behind the discount yield is to determine how much yield will be realized in the current financial year.

In order to determine the annual discount yield, it is necessary to utilize a few basic factors related to the security. The first figure that is required is the face amount of the security. Next, the face amount is multiplied by the number of days in the fiscal year. Once that calculation is complete, the result is divided by the number of days remaining until the security reaches maturity.

Investors often make use of this formula to project the discount yield when evaluating the feasibility of purchasing or holding on to the security. Doing so makes it possible to determine if a given security is likely to result in a return that the investor considers to be in line with the degree of risk associated with the investment. Should the investor decide that the discount yield is not sufficient, the security can be avoided and the investor can turn his or her attention to other investment opportunities.

In the event that the security is already part of the investment portfolio, the investor will use the formula to determine if the investment is still as attractive as when it was first purchased. Should the investor decide that the security is not going to provide an acceptable yield in the current financial year, the security may be offered for sale. Once the security is sold, the investor can make use of the proceeds from the sale and invest the money in another security that demonstrates the promise of a better yield.

While seasoned investors are usually able to quickly calculate a discount yield without assistance, people who are just beginning to build an investment portfolio may wish to seek the counsel of a financial advisor or an investment broker. Both professionals can help the novice investor to identify specific opportunities involving securities where the discount yield is likely to be attractive. At the same time, they can also assist the new investor to select securities that demonstrate very little risk.