101 Concepts for the Level I Exam

Concept 4: Yield Measures for Money Market Instruments

$Bank\ discount\ yield\ (BDY)\ =\left({{D}\over {F}}\right)\times \left({{360}\over {t}}\right)$$ $$Holding\ period\ yield\ (HPY)=\ {{P_1\ --\ P_0\ +\ D_1}\over {P_0}}$$ $$Effective\ annual\ yield\ (EAY)={(1\ +\ HPY)}^{{{365}\over {t}}}-1$$ $$Money\ market\ yield\ (MMY)=HPY\ \times {{360}\over {t}}$

Consider a T-Bill with a face value of $100 and 60 days to maturity. It is selling at a discount of $2 i.e. at a price of $98. Calculate BDY, HPY, EAY and MMY.

Solution:

$Bank\ discount\ yield\left(BDY\right)=\ \left({{2}\over {100}}\right)*\left({{360}\over {60}}\right)=12\%$$ $$Holding\ period\ yield\ \left(HPY\right)=\ {{100\--\ 98\ +\ 0}\over {98}}=2.04\%$$ $$Effective\ annual\ yield\left(EAY\right)=\ {\left(1\ +\ 0.0204\right)}^{{{365}\over {60}}}-1=13.07\%$$ $$Money\ market\ yield\ \left(MMY\right)=2.04\%\ \times {{360}\over {60}}=12.24\%$