- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 8. Yield and Yield Spread Measures for Floating-Rate Instruments
- Subject 2. Yield Measures for Money Market Instruments

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**CFA Practice Question**

The bond equivalent yield of a 120-day banker's acceptance quoted at a discount rate of 4.0% for a 360-day year is closest to ______.

B. 3.96%

C. 4.10%

A. 3.89%

B. 3.96%

C. 4.10%

Correct Answer: C

By design, a money market discount rate understates the rate of return. The bond equivalent yield has to be higher than 4.0%, so C is the only possible answer.

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**User Contributed Comments**
7

User |
Comment |
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HolzGe1 |
1) Find the PV of the discount quoted banker's acceptance: PV = FV * (1 - Days/Year * DR) = 100 * (1 - 120/360 * 4%) = 98.667 2) Find its AOR, using 365 days/year: AOR = (Year/Days) * [(FV - PV) / PV] = (365/120) * [(100 - 98.667) / 98.667] = 4.11034% Close enough. |

deliawmx |
Actually, I find a simple formula in my finance introduction textbook in order to calculate the BEY if we know the discount rate.The formula is as follow: BEY=365*(discount yield)/[360-(days to maturity*discount yield)] so BEY=365*4%/[360-(120*4%)]=4.11036% |

robbiecow |
Just to clarify one point about the above formula that deliawmx posted. This formula can only be used is for discount instruments with up to 182 days to maturity. The reason being that bonds with more than a half year to maturity have one more coupon to pay. There is another formula for > 182 days to maturity and it is a lot more complicated to write out. |

nsbwong |
Basically, since the following inequality applies: (FV-PV)/FV < (FV-PV)/PV Then it's natural to choose a rate greater than the Discount rate, so A and B are incorrect. |

Kiniry |
Am I mistaken in stating that for this problem, no computation is required because the discount rate is always understated (and therefore that the bond equivalent yield must be higher)? |

khalifa92 |
I. lower II. lower III. higher thus III. is the answer |

khalifa92 |
ohhhhh understate cause its simple interest man |