### CFA Practice Question

There are 490 practice questions for this study session.

### 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 ______.

A. 3.89%
B. 3.96%
C. 4.10%

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.

User Comment
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