- CFA Exams
- CFA Exam: Level I 2021
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 6. Yield Measures for Floating-Rate Notes and Money Market Instruments
CFA Practice Question
There are 490 practice questions for this study session.
CFA Practice Question
A Treasury bill with 50-days till maturity is quoted with a bank discount rate of 3.50%. An investor purchasing $2,000,000 face value of this Treasury bill would earn a return equivalent to a CD paying ______.
Correct Answer: B
MMY = (360 x 0.035)/(360 - 50 x 0.035) = 3.5171%
User Contributed Comments 14
|hrai1||How do you derive this relationship?|
|AdriGul||$1,990,277.78 X (1+R*50/360) = $2,000,000
Solve for R
Purchase price increases by a rate using the D/360 convention that gets the price up to the face value by the maturity date
|0is4eva||Calculate face value less discount amount, which is what the investor is actually paying.
F - D = 2,000,000 * (1 - 0.0350 * 360/50) = 1,990,278
(P1 - P0 + D1)/P0 = 2,000,000/1,990,278 ==> HPY = 0.48847%
CD is quoted by CD equivalent yield, also known as money market yield.
rMM = HPY * 360/t = 0.0048847*360/50 ==> 3.51%
The answer is B, 3.5171%
|Lucho||calculate PV discounted @ 3.5%, then calculate i% through the TVM menu
|surob||It is easier to apply this formula:
|tabulator||Yep, just plug it into the money market rate formula|
|bdaguy||FYI, if you work out the algebra, the Money Market Yield is equal to
[(FV - MP)/MP] x (360/T)
FV = Face Value
MP = Market Value
T = Time to maturity
The difference between this and the Bank Discount Yield is that Market Value is used as the denominator of the first part instead of the Face Value.
|8thlegend||Wow algebra fail.
I understand why the formula didn't work the first time.
When you are doing the denominator its
Make sure you do the t*BDY then subtract 360.
I did 360-50 then *BDY then you will get the wrong answer.
|bidisha||8th legend i did exact same thing on my first try...good thing we have these examples to try on first|
|Yrazzaq88||Calculate Rmm (Use the formula)
Then, to calculate MMY:
Take the Rmm, multiply by 360/50days
|CWade10||Could show me the relationship between the two methods of Calculation:
1. = (360xBDY)/[(360-t)(BDY)]
2. = HPY x (360/t)
I just want to see the process of this to help understand the concept better.
|choas69||i try the same formula but aint working with and my calculatar aint faulti|
12.6/10.85 = 1.1613
wheres my error ?
|choas69||i can solve it with MMY = HPY * (360/50)
but cant with the other formula