I feel so difficult to convert among EAY, HPY, rmm, and Bondequivalent yield…
Here is the question:
A firm is choosing among three shortterm investment securities:
Security 1 A 30day U.S. Treasury bill with a discount yield of 3.6%
Security 2 A 30day banker’s acceptance selling at 99.65% of face value
Security 3 A 30day time deposit with a bond equivalent yield of 3.65%
A) Prefer 2
B) Indifferent between 2 and 3
C) Prefer 1
D) Prefer 3
Solution:
Convert them to basis: Bond equivalent yield
Security 1 = discount is 3.6%(30/360) = 0.3%
BEY = (0.3/9937)(365/30) = 3.661%
BEY of security 2 = (0.35/99365) x (365/30) = 4.273%
BEY 3 = 3.65% (given)
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After I read the solution, I have no idea what it is doing. How it convert to BEY. I do not know where the number (e.g. 99.7, 0.35) come from. Please help please help. I am so confuse. Any suggestion to memorize these formulas………….. so tough
