what is the discount yield 
the discount yield is a way of calculating a bond s return when it is sold at a discount to its face value expressed as a percentage discount yield is commonly used to calculate the yield on municipal notes commercial paper and treasury bills sold at a discount the formula for discount yield is discount yield is calculated as and the formula uses a 30 day month and 360 day year to simplify the calculation image by sabrina jiang investopedia 2021understanding the discount yielddiscount yield computes a discount bond investor s return on investment roi if the bond is held until maturity a treasury bill is issued at a discount from par value face amount along with many forms of commercial paper and municipal notes which are short term debt instruments issued by municipalities u s treasury bills have a maximum maturity of six months 26 weeks while treasury notes and bonds have longer maturity dates if a security is sold before the maturity date the rate of return earned by the investor is different and the new rate of return is based on the sale price of the security if for example the 1 000 corporate bond purchased for 920 is sold for 1 100 five years after the purchase date the investor has a gain on the sale the investor must determine the amount of the bond discount that is posted to income before the sale and must compare that with the 1 100 sale price to calculate the gain a zero coupon bond is a another example of a discount bond depending on the length of time until maturity zero coupon bonds can be issued at substantial discounts to par sometimes 20 or more because a bond will always pay its full face value at maturity assuming no credit events occur zero coupon bonds will steadily rise in price as the maturity date approaches these bonds don t make periodic interest payments and will only make one payment of the face value to the holder at maturity exampleassume for example that an investor purchases a 10 000 treasury bill at a 300 discount from par value a price of 9 700 and that the security matures in 120 days in this case the discount yield is 300 discount 10 000 par value 360 120 days to maturity or a 9 dividend yield the differences between discount yield and accretionsecurities that are sold at a discount use the discount yield to calculate the investor s rate of return and this method is different than bond accretion bonds that use bond accretion can be issued a par value at a discount or a premium and accretion is used to move the discount amount into bond income over the remaining life of the bond assume for example that an investor purchases a 1 000 corporate bond for 920 and the bond matures in 10 years since the investor receives 1 000 at maturity the 80 discount is bond income to the owner along with interest earned on the bond bond accretion means that the 80 discount is posted to bond income over the 10 year life and an investor can use a straight line method or the effective interest rate method straight line posts the same dollar amount into bond income each year and the effective interest rate method uses a more complex formula to calculate the bond income amount 