- CFA Exams
- CFA Level I Exam
- 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

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**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 ______.

B. 3.5171%

C. 3.5000%

A. 3.6213%

B. 3.5171%

C. 3.5000%

Correct Answer: B

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

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**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 |