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Basic Question 7 of 10
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%
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 |
I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu
Learning Outcome Statements
calculate and interpret yield measures for money market instruments
CFA® 2024 Level I Curriculum, Volume 4, Module 8.