Converting Bank Discount Yield to a Money Market Yield other, items, where, easily, moving

ShooterMcCFA

Hi All,

any good tips on this one? Also converting from rMM to rBD.

I know the formulas just don't get the same algebra as with HPY and EAY, where one formula can be easily converted just by moving items from one side to the other.

thank you

evolsteevol

The text recommends to do:

BDY --> HPY --> MMY

I think this is easier to to although it takes 1 more step.

MY QUESTION:

with the EAY (Effective Annual Yield), why do the consider compounding? No compounding actually takes place since it's a 1-year security.

FVPV

Just remember BDY is the odd one out as it uses face value in its denominator.

From BDY, you are able to get HPY (which is used to calculate EAY and MMY too) easily. Next, the difference between EAY and MMY is that the former has compounding and use 365 days.

Try to work around with the HPY as it is central to the rest.

@gazhoo
Yes, if a security has annual compounding, its interest = the EAY. If a security has semi-annual compounding, its EAY = (1+r/2)^2 - 1

Daniel1985

would you able to show the steps to convert from BDY to HPY? As BDY uses P1 while HPY uses P0 I don't see the simple algebra behind it. Thank you!

Kiakaha

BDY = D/F X 360/t

HPY = (P1 - P0 + D1)/P0 - 1

Therefore to calculate HPY, you need to know P1 and P0.

From BDY and the question given, face value = P1.

As for P0, you need to calculate it. Question might give you BDY and you just have to solve for D and uses D to solve for P0. Question might also give you D and BDY and not telling you the face value.

Bluetick1010

Hi revenant,

I have the same question as timea. I fully understood everything you tried to explain above, but you still didn't point out exactly how to switch from BDY to MMY. I know that the formula we need to get to is MMY=360*BDY/360-(t*BDY), but can you show the actual steps on how to get to this one?

Thanks in advance,
T

rh博

Hi revenant,
BDY = D/F*360/t
       = [HPY/(1+HPY)]*(360/t)
       = MMY*360/(t+MMY* 360)
MMY = 360*BDY/360-(t*BDY)