2024 CFA Level I Exam: CFA Study Preparation

Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.

Unique characteristics:

Yield measures are annualized but not compounded.
Often quoted using non-standard interest rates (discount rate or add-on rate? 360-day year or 365-day year? redemption value amount (FV) or price at issuance (PV)?)
Different periodicities

Money market instruments need to be converted to a common basis for analysis.

Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of a 360-day year using simple interest.

Discount rate:

Note that the denominator is FV, not PV. The rate of return is therefore understated.

Add-on rate:

Note the only difference: the denominator is PV, not FV.

Bond equivalent yield: money market rate stated on a 365-day add-on rate basis.

Example

90-day T-bill, face value 100, quoted discount rate: 2.5% for an assumed 360-day year.

PV = 100 x (1 - 90/360 x 0.025) = 99.375
To calculate the bond equivalent yield for a 365-day year:
AOR = (365/90) x (100 - 99.375)/99.375 = 2.55%

User	Comment
DannyM	Do we need to memorize equation 8, the valuation of an FRN?
cfa1980	I doubt it. It's important to understand the relationship, not memorizing the formula.
robertdole	CFAI notebook has questions on FRN valuation so I imagine you would need to know how to apply the formula
khalifa92	LOOOL this equation 8 is so simple it makes a person confidence sky rocket to the moon.
ginarapp1	Can you calculate these with BAI II?

You need to log in first to add your comment.

Your review questions and global ranking system were so helpful.

No flashcard found. Add a private flashcard for the subject.