Fixed Income: Eurocommercial paper rates are quoted as an add-on-yield.

[stuartbale1]

What is the add-on-yield and how it is calculated.

 

[S2000magician]

I’d imagine that it’s LIBOR or Eurobor.
It’s calculated just as you’d suspect. For example, if the face value is €1,000 for 270-day paper with an interest rate of 6%, then the interest is:
€1,000 × 6% × 270/360 = €45

 

[stuartbale1]

Ok here is an example :
A 180-day T-bill quoted at a discount yield of 2% for the 180-day period is priced at $980 per $1000 face value.
What would be the add-on-yield on this

 

[S2000magician]

$20/$980 × 360/180 = 4.0816%

 

[stuartbale1]

Ok for ECP with a 180-day period, and the same details what would be the addon yield.

 

[stuartbale1]

Sorry for making things confusing but i am not getting the concept here, is it the Bank-discount yield we studied in Quantitative Methods.

 

[Tartaglia]

I have the same problem with this. Schweser notes do not really provide an explanation on how to compute this. I found this formula which is the same as S2000 used above (except for the 365 instead of 360 days):
http://www.investment-and-finance.net/finance/a/add-on-yield.html
Add-On Yield= quoted annual rate* n/365
So in your example, I would get:
Add-On Yield= 2%* 180/365=0.9863%