### CFA Practice Question

There are 120 practice questions for this study session.

### CFA Practice Question

A company is investigating the purchase of a banker's acceptance (BA). The \$1,000,000 face value BA has 150 days to maturity and is quoted at 4.05 percent on a discount-basis yield. If the company's marginal tax rate is 25 percent, then the money market yield on the BA is closest to ______.

A. 3.13%
B. 4.12%
C. 4.18%

Money market yield = discount-basis yield x (face value / purchase price) Purchase price = face value - [face value x discount-basis yield x (days to maturity / 360)] = \$1,000,000 - [\$1,000,000 x 0.0405 x (150 / 360)] = \$983,125 Money market yield = 4.05% x (\$1,000,000 / \$983,125) = 4.12%

User Comment
dvallejo Anybody please, explain in detail how to obtain these formulas???
leon121 Best way is to use MMY formula = (360 x BDY) / (360-t x BDY) = (360 x .0405) / (360 - 150*.0405) = 0.0412
Kevdharr It is issued at a discount of 4.05%. That percentage is annualized so you have to adjust it for the number of days until the BA matures. It matures in 150 days. So take 150 days and divide it by 360 (use 360 instead of 365 because this is the money market yield). Do that and you get 0.41667. Multiply that by 4.05% and you get 1.688%.

Now, multiply 1.688% by the face value of \$1,000,000 and you get the discount interest amount in terms of dollars. A discount of \$16,880 means the purchase price was \$983,120(\$1,000,000 - \$16,880).

The money market yield equals the discount interest amount divided by the purchase price TIMES 360/number of days to maturity.
So...
(\$16,880/\$983,125)*(360/150) = 0.01717 * 2.4 = 4.12%
Marinov Why is the tax rate irrelevant here?
walterli money market yield=(face value-purchase price)/purchase price * (360/time to maturity)