Pure discount instruments such as T-bills are quoted differently than U.S. government bonds. They are quoted on abank discount basis rather than on a price basis:
Bank discount yield is not a meaningful measure of the return on investment because:
Holding period yield (HPY) is the return earned by an investor if the money market instrument is held until maturity:
Since a pure discount instrument (e.g., a T-bill) makes no interest payment, its HPY is (P1 - P0)/P0.
Note that HPY is computed on the basis of purchase price, not face value. It is not an annualized yield.
The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest.
Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of a 360-day year using simple interest.
Example
An investor buys a $1,000 face-value T-bill due in 60 days at a price of $990.
If we know HPY, then:
If we know EAY, then:
If we know rMM, then:
Learning Outcome Statements
e. calculate and interpret the bank discount yield, holding period yield, effective annual yield, and money market yield for U.S. Treasury bills and other money market instruments;status | not read | reprioritisations | ||
---|---|---|---|---|
last reprioritisation on | suggested re-reading day | |||
started reading on | finished reading on |