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:
|Money Market Yield = HPR ×||360|
Where HPR is the holding period return and t is the number of days between the issue date and maturity date.
Holding period return is the percentage total return.
|Holding Period Return =||F − P|
Money market yield equation can be modified as follows:
|Money Market Yield =||F − P||×||360|
Where F is the face value i.e. maturity value of the investment and P is the initial issue price.
Converting Bank Discount Yield to Money Market Yield
If we know the bank discount yield, we can work out the money market yield using the following formula::
|MMY =||360 × BDY|
|360 - t × 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|
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.
|Money Market Yield =||$100 − $99.666333||×||360||= 1.3244%|
|MMY =||360 × 1.32%||= 1.3244%|
|360 - 91 × 1.32%|
Written by Obaidullah Jan, ACA, CFA and last modified on