The bank discount rate measures the discount against face value on a 360-day year. But you invest the price, not the face value, and a year has 365 or 366 days. So the discount rate understates what you earn on your money.
The investment rate, also called the coupon-equivalent yield, restates the same bill as a return on the price paid. It is the figure to use for comparison with other investments. For a bill held to maturity it represents the yield to maturity, before any fees or taxes.
Investment rate, bills of a half-year or less
Rate = (100 − Price) ÷ Price × (365 ÷ Days) × 100
Use the number of days in the year following issue. Bills over a half-year use a quadratic form, so they stay comparable to a security paying a semiannual coupon.
Try it: the same discount rate at different terms
| Days | Price per 100 | Investment rate |
|---|---|---|
| 28 | 99.688889 | 4.068% |
| 91 | 98.988889 | 4.097% |
| 182 | 97.977778 | 4.139% |
| 364 | 95.955556 | 4.183% |
Illustrative numbers you can change. Not a quote or a market rate.
Key points
- The discount rate uses face value and 360 days.
- The investment rate uses price paid and 365 or 366 days.
- For the same bill, the investment rate is higher.
General information only. It is not investment, legal or tax advice. Details vary by market and can change, so check the issuer’s current rules.