F

Question 1

HPY, EAY, Rmm can be used as a basis to calc. other two, but remember that…

Answer 1

HPY is the actual return an investor will recieve if the money market instrument is held until maturiy

EAY is the annualized HPY on the basis of a 365-day year and incorporates the effects of compounding

The Rmm is the annualized yield that is based on price and a 360-day year and does not account for the effects of compounding - it assumes simple interest

Question 2

EAY basis (Rmm to HPY, v versa)

Answer 2

“You purched a 100 k T-bill that matures in 150 days for a price of 90k. The broker who sold you the T-bill quoted the money market yield at 4.898%. Compute the HPY and EAY

Question 3

Rmm basis

Answer 3

“You purched a 100 k T-bill that matures in 150 days for a price of 90k. The broker who sold you the T-bill quoted the money market yield at 4.898%. Compute the HPY and EAY

HPY:

Rmm to HPY: (given money market yield): .04898 (150/360) *Rmm is annualized at 360 days = %2.041

HPY to EAY: EAY = (1+HPY)^365/150 -1 (EAY is annualized at 365 days) - EAY back to HPY, simply flip the recipricol of the exponent

Question 4

LEvel 1 tip: Concentrate on converting back and forth between the HPY and the other yield figures

Answer 4

Note: Reminder: EAY and Rmm are merely annualized versions of the HPY

Question 5

Bond Equivalent Yield

Answer 5

BEY: refers to 2 x the semiannual discount rate, which is based on the fact that yields on US bonds are quoted as twice the semiannual rate, becase the coupon interest is paid in two semiannual payments.

Calc: Convert N’month’ yield to an effective semiannual (2xN) yield.

HPR x (365/t)