What is Yield Basis?
Yield basis refers to the act of quoting bond prices in terms of yield percentages rather than in dollars.
How Does Yield Basis Work?
Let's assume Company XYZ has $20,000,000 in bonds outstanding that pay 5% interest per year (or $50 per $1,000 bond). If the bonds are trading at $900 apiece, then the yield basis is:
$50/$900 = 0.0555 or 5.55%
Why Does Yield Basis Matter?
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.