The treasurer of a large corporation wants to invest $13 million in excess short

Question

The treasurer of a large corporation wants to invest $13 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 6.37 percent; that is, the EAR for this investment is 6.37 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 86 days, what are the bond equivalent and discount yields on this investment?

Explanation / Answer

EAR = {1+ (APR*86/365)}365/86

1.0637 = {1+ (APR*86/365)}365/86

APR = 0.0622 = 6.22%

Bond Equivalent yield = APR = 6.22%

Discount yield = [360(.0622)]/[365 + (86)(.0622)] = 0.0605 = 6.05%

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