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 ______.

A. 3.6213%
B. 3.5171%
C. 3.5000%
Correct Answer: B

MMY = (360 x 0.035)/(360 - 50 x 0.035) = 3.5171%

User Contributed Comments 14

User Comment
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
Calculate HPY:
(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:
360*Rbd/(360-Rbd*t)
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
(360-t*BDY)
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
choas69 360*0.035= 12.6
310*0.035= 10.85
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
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