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With discount securities, the instrument is issued at a discount to face value and redeemed at face value at maturity.
The return to an investor is the difference between the discounted purchase price and the face value of the security. Discount securities are generally quoted on a discount rate, on a 360 day year basis. The discount rate is calculated as follows:
This rate, when applied to the face value, will give the purchase price (the proceeds). The following formula is used:
Let’s look at a 90 day US Treasury bill (T-bill). The 90-day T-Bill has a par value of $100,000, and is quoted at a discount rate of 9%. What is its price today? The calculation is as follows: $100,000 x {1 - (9 x 90 / 100 x 360)} = $97,750.00
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