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Question 1

Bank Discount Yield

Answer 1

a ‘pure discount’; US T-Bills; Bank discount basis: Based on FV, not purchase price

Distinction from other yield calculations of US T bills and other money market instruments: It expresses the dollar discount from the face (par) value as a fraction of the face value, not the market price of the instrument.
Distinction 2: BDY is ‘annualized’: Discount-to-par(360/’t’ time to maturity) time to maturity)

IMPORTANT
A yield quoted on a bank discount basis is not representative of the return earned by an investor for the following reason:
1. BDY uses simple, not compound interest
2. BDY is based on FV, not purch. price Investment returns should be evaluated relative to the amount invested
3. BDY annualized 360 rather than 365

Question 2

Holding Period Yield aka Holding Period Return

Answer 2

Interp: The total return an investor earns between the prucahse date and the sale or maturiy date. HPY is calc. using: P1-P0+D1/P0 = P1 +D1 / P0

P0: Initial price ‘price’
P1: Price received for instrument at maturity ‘face value’
D1: Interest payment (distribution) ‘0’ for T-bills, because they’re ‘pure disc. instruments’

Question 3

Effective Annual Yield (EAY)

Answer 3

EAY is an ‘annualized’ value aka ‘365/t’ that ACCOUNTS FOR COMPOUND INTEREST.

Calc: EAY = (1+HPY)(^365/t )- 1

*To calc HPY given EAY, make the ‘annualized value a reciprocal’

Question 4

Money Market Yield (CD equivalent)

Answer 4

• It’s ‘annualized’ as 360
• Using the money market yield makes the quoted yield on a T-bill comparable to yield quotes for interest-bearing money market instruments that pay interest on a 360-day basis

Calc: 360/t (HPY)

*Given Rbd, Rmm (money market yield) may be calc. using Rmm = 360 x Rbd / 360 - (t x Rbd)