2025 CFA Level I Exam: CFA Study Preparation

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Unique characteristics:

Yield measures are annualized but not compounded.
Often quoted using non-standard interest rates (discount rate or add-on rate? 360-day year or 365-day year? redemption value amount (FV) or price at issuance (PV)?)
Different periodicities

Money market instruments need to be converted to a common basis for analysis.

Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of a 360-day year using simple interest.

Discount rate:

Note that the denominator is FV, not PV. The rate of return is therefore understated.

Add-on rate:

Note the only difference: the denominator is PV, not FV.

Bond equivalent yield: money market rate stated on a 365-day add-on rate basis.

Example

90-day T-bill, face value 100, quoted discount rate: 2.5% for an assumed 360-day year.

PV = 100 x (1 - 90/360 x 0.025) = 99.375
To calculate the bond equivalent yield for a 365-day year:
AOR = (365/90) x (100 - 99.375)/99.375 = 2.55%

User	Comment
DannyM	Do we need to memorize equation 8, the valuation of an FRN?
cfa1980	I doubt it. It's important to understand the relationship, not memorizing the formula.
robertdole	CFAI notebook has questions on FRN valuation so I imagine you would need to know how to apply the formula
khalifa92	LOOOL this equation 8 is so simple it makes a person confidence sky rocket to the moon.
ginarapp1	Can you calculate these with BAI II?

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