# 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.

## Formula

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.

## Example

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, ACA, CFA and last modified on