Money Market Yield

Money market yield is the rate of return on highly liquid investments with a maturity of less than one year. It is calculated by multiplying the holding period return with a factor of 360/t where t is the number of days between the issue date and maturity date of the investment.

Money market yield is a better indicator of rate of return than the bank discount yield, but it still lacks the compounding effect included in calculation of effective annual yield.


Money market yield can be calculated using the following formula:

$$ MMY=HPR\times\frac{360}{t} $$

Where MMY is the money market yield, HPR is the holding period return and t is the number of days between the issue date and maturity date.

HPR equals the percentage of total return with reference to the initial price of the investment:

$$ HPR=\frac{F-P}{P} $$

Money market equation can be modified as follows:

$$ MMY=\frac{F-P}{P}\times\frac{360}{t} $$

Where F is the face value i.e. maturity value of the investment and P is the initial issue price.

Money market yield can be arrived at using the bank discount yield using the following formula:

$$ MMY=\frac{360\ \times BDY}{360\ -\ t\times BDY} $$

Where BDY is the bank discount yield.


In the example on bank discount yield we find out that BDY for the following T-bill is 1.32000%:

CUSIP Security Term Auction Date Issue Date Maturity Date Price per $100
912796NW5 13-Week 12/11/2017 12/14/2017 3/15/2018 99.666333

There are two ways to calculate money market yield; (a) directly using the price and face value and (a) by adjusting the bank discount yield.

$$ MMY=\frac{$100\ -\ $99.666333}{$99.666333}\times\frac{360}{91}=1.3244\% $$

$$ MMY=\frac{360\ \times1.32000\%}{360\ -\ 91\times\ 1.32000\%}=1.3244\% $$

Written by Obaidullah Jan