{"id":46196,"date":"2023-09-03T12:23:04","date_gmt":"2023-09-03T12:23:04","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=46196"},"modified":"2026-02-10T09:42:52","modified_gmt":"2026-02-10T09:42:52","slug":"yield-spread-measures-for-money-market-instruments","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/yield-spread-measures-for-money-market-instruments\/","title":{"rendered":"Yield Spread Measures for Money Market Instruments"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Yield and Yield Spread Measures for Floating Rate Instruments (2025 CFA\u00ae Level I Exam \u2013 Fixed Income \u2013 Learning Module 8)\",\n  \"description\": \"This CFA\u00ae Level I Fixed Income lesson covers yield and yield spread measures for floating-rate instruments and money market securities. The video explains how to calculate and interpret quoted margin, discount margin, and other spread measures for floaters, as well as key yield conventions used for money market instruments. The focus is on exam-relevant calculations, interpretation, and common pitfalls tested in Learning Module 8.\",\n  \"uploadDate\": \"2023-11-21\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/Uqj4ThECWww\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=Uqj4ThECWww\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/Uqj4ThECWww\",\n  \"duration\": \"PT19M56S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"How do you compute the bond equivalent yield of a Treasury bill quoted on a discount basis?\",\n    \"text\": \"The bond equivalent yield of a 180-day Treasury bill quoted at a discount rate of 0.75% for a 360-day year is closest to:\\n\\nA. 0.750%\\n\\nB. 0.753%\\n\\nC. 0.763%\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C: 0.763%. First, compute the price per $100 of par using the discount rate: PV = 100 \u00d7 [1 \u2212 (180\/360 \u00d7 0.75%)] = 99.625. Next, calculate the add-on (bond equivalent) yield using AOR = (365\/180) \u00d7 [(100 \u2212 99.625) \/ 99.625], which equals approximately 0.763%.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/Uqj4ThECWww?si=3OF_yG372qI4jGUE\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<p>Money market instruments are short-term debt securities with original maturities of one year or less. They are a crucial part of the financial market and include a variety of instruments such as overnight sale and repurchase agreements (repos), bank certificates of deposit, commercial paper, Treasury bills, bankers\u2019 acceptances, and time deposits based on market reference rates. For instance, a company might issue commercial paper to meet its short-term liquidity needs. Money market mutual funds, which invest solely in eligible money market securities, are sometimes considered as an alternative to bank deposits.<\/p>\n\n\n\n<p>Yield measures for money market instruments differ from those for bonds in several ways.<\/p>\n\n\n\n<p>Firstly, bond yields-to-maturity are annualized and compounded, while yield measures in the money market are annualized but not compounded. This means the return on a money market instrument is stated on a simple interest basis. For example, if you invest $1000 in a 90-day Treasury bill with a yield of 1%, you would earn $10 at the end of the period.<\/p>\n\n\n\n<!-- TOP CTA \u2013 Full Width Outline Button -->\n<div style=\"margin:24px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n       display:block;\n       width:100%;\n       padding:14px 0;\n       border:2px solid #3b6fd8;\n       border-radius:50px;\n       font-size:18px;\n       font-weight:500;\n       text-align:center;\n       text-decoration:none;\n       color:#3b6fd8;\n       background-color:#f4f6f9;\n       box-sizing:border-box;\n     \">\n     Practice yield spread questions with free trial access.\n  <\/a>\n<\/div>\n\n\n\n<p>Secondly, bond yields-to-maturity are usually stated for a common periodicity for all times-to-maturity, while money market instruments with different times-to-maturity have different periodicities for the annual rate.<\/p>\n<p>Lastly, bond yields-to-maturity can be calculated using standard time-value-of-money analysis, while money market instruments are often quoted using non-standard interest rates and require different pricing equations than those used for bonds.<\/p>\n<p>Quoted money market rates are either discount rates or add-on rates. Commercial paper, Treasury bills, and bankers\u2019 acceptances are often quoted on a discount rate basis, while bank certificates of deposit, repos, and market reference rate indexes are quoted on an add-on rate basis. In the money market, the discount rate involves an instrument for which interest is included in the face value of the instrument, while an add-on rate involves interest that is added to the principal or investment amount.<\/p>\n<p>The pricing formula for money market instruments quoted on a discount rate basis is:<\/p>\n<p><span class=\"math display\">\\[PV = FV \\times \\left( 1 &#8211; \\frac{\\text{Days}}{\\text{Year}} \\times DR \\right)\\]<\/span><\/p>\n<p>Where:<\/p>\n<p>PV = present value, or the price of the money market instrument<\/p>\n<p>FV = the future value paid at maturity, or the face value of the money market instrument<br \/>Days <span class=\"math inline\">\\(=\\)<\/span> the number of days between settlement and maturity<\/p>\n<p>Year <span class=\"math inline\">\\(=\\)<\/span> the number of days in the year<\/p>\n<p><span class=\"math inline\">DR = <\/span> the discount rate, stated as an annual percentage rate<\/p>\n<p><span class=\"math display\">\\[DR = \\frac{\\text{Year}}{\\text{Days}} \\times \\frac{(FV &#8211; PV)}{FV}\\]<\/span><\/p>\n<p>The pricing formula for money market instruments quoted on an add-on rate basis is:<\/p>\n<p><span class=\"math display\">\\[PV = \\frac{FV}{1 + \\frac{\\text{Days}}{\\text{Year}} \\times AOR}\\]<\/span><\/p>\n<p>Where:<\/p>\n<p>PV = present value, the principal amount, or the price of the money market instrument<\/p>\n<p><span class=\"math inline\">FV =<\/span> the future value, or the redemption amount paid at maturity, including interest<\/p>\n<p>Days <span class=\"math inline\">\\(=\\)<\/span> the number of days between settlement and maturity<\/p>\n<p>Year <span class=\"math inline\">\\(=\\)<\/span> the number of days in the year<\/p>\n<p><span class=\"math inline\">AOR =<\/span> the add-on rate, stated as an annual percentage rate<\/p>\n<p><span class=\"math display\">\\[AOR = \\frac{\\text{Year}}{\\text{Days}} \\times \\frac{FV &#8211; PV}{PV}\\]<\/span><\/p>\n<p>Investment analysis is more challenging for money market securities because some instruments are quoted on a discount rate basis while others are on an add-on rate basis, and some assume a 360-day year, and others use a 365-day year. Furthermore, the \u201camount\u201d of a money market instrument quoted by traders on a discount rate basis typically is the face value paid at maturity, while the \u201camount\u201d when quoted on an add-on rate basis usually is the price at issuance.<\/p>\n<h2 id=\"comparing-money-market-instruments-on-bond-equivalent-yield-basis\">Comparing Money Market Instruments on Bond Equivalent Yield Basis<\/h2>\n<p>The bond equivalent yield, often termed the investment yield, quantifies a money market rate using a 365-day add-on rate method.<\/p>\n<p>Step 1:<\/p>\n<p>For money market assets priced with a Discount Rate (DR), compute the Price for every 100 of Par (PV) as:<\/p>\n<p><span class=\"math display\">\\[PV = FV \\times \\left( 1 &#8211; \\frac{\\text{Days}}{\\text{Year}} \\times DR \\right)\\]<\/span><\/p>\n<p>Step 2:<\/p>\n<p>From the PV obtained in Step 1, determine the Add-on Rate (AOR) for that specific money market asset:<\/p>\n<p><span class=\"math display\">\\[AOR = \\frac{\\text{Year}}{\\text{Days}} \\times \\left( \\frac{FV &#8211; PV}{PV} \\right)\\]<\/span><\/p>\n<p>Step 3:<\/p>\n<p>The Bond Equivalent Yield (BEY) represents a money market rate defined using a 365-day AOR method.<\/p>\n<p>With this, the asset can be evaluated alongside other money market assets that use the Bond Equivalent Yield as their standard.<\/p>\n<h4 id=\"example-determining-the-bond-equivalent-yield\">Example: Determining the Bond Equivalent Yield<\/h4>\n<p>Suppose an investor is comparing the following two money market instruments:<\/p>\n<ol type=\"A\">\n<li>A 60-day Treasury bill issued by the government, quoted at a discount rate of <span class=\"math inline\">\\(0.050\\%\\)<\/span> for a 360-day year.<\/li>\n<li>A 60-day bank certificate of deposit, quoted at an add-on rate of <span class=\"math inline\">\\(0.060\\%\\)<\/span> for a 365-day year.<\/li>\n<\/ol>\n<p>Which one offers the higher expected rate of return, assuming the same credit risk?<\/p>\n<p id=\"solution\"><strong>Solution<\/strong><\/p>\n<p>60-day Treasury bill:<\/p>\n<ul>\n<li>Days <span class=\"math inline\">\\(= 60\\)<\/span><\/li>\n<li>Year <span class=\"math inline\">\\(= 360\\)<\/span><\/li>\n<li>DR (Discount Rate <span class=\"math inline\">\\() = 0.050\\%\\)<\/span> or 0.0005<\/li>\n<\/ul>\n<p>Using the formula:<\/p>\n<p><span class=\"math display\">\\[PV = FV \\times \\left( 1 &#8211; \\frac{\\text{Days}}{\\text{Year}} \\times DR \\right)\\]<\/span><\/p>\n<p>\\[PV = 100 \\times \\left( 1 \u2013 \\frac{\\text{60}}{\\text{360}} \\times 0.0005 \\right) = 99.99167 \\]<\/p>\n<p><span class=\"math display\">\\[AOR = \\frac{\\text{Year}}{\\text{Days}} \\times \\left( \\frac{FV &#8211; PV}{PV} \\right)\\]<\/span><\/p>\n<p>\\[ AOR = \\frac{365}{60} \\times \\left( \\frac{100 &#8211; 99.99167}{99.99167} \\right) = 0.05068\\% \\]<\/p>\n<p>The bond equivalent rate is, therefore, 0.05068%<\/p>\n<p>The bond equivalent rate for the 60-day bank certificate of deposit is <span class=\"math inline\">\\(0.060\\%\\)<\/span> or 0.0006.<\/p>\n<p>The 60-day Treasury bill offers a lower annual return relative to the 60-day bank certificate of deposit.<\/p>\n<blockquote>\n<h3 id=\"question\">Question<\/h3>\n<p>The bond equivalent yield of a 180-day Treasury bill quoted at a discount rate of 0.75% for a 360 -day year is closest to:<\/p>\n<ol type=\"A\">\n<li>0.750%<\/li>\n<li>0.753%<\/li>\n<li><span class=\"math inline\">0.763%<\/span><\/li>\n<\/ol>\n<p id=\"solution-1\"><strong>Solution<\/strong><\/p>\n<p>The correct answer is<strong> C.<\/strong><\/p>\n<p>Step 1:<\/p>\n<p>For money market assets priced with a Discount Rate (DR), compute the Price for every 100 of Par (PV) as:<\/p>\n<p><span class=\"math display\">\\[PV = FV \\times \\left( 1 &#8211; \\frac{\\text{Days}}{\\text{Year}} \\times DR \\right)\\]<\/span><\/p>\n<p><span class=\"math display\">\\[PV = 100 \\times \\left( 1 &#8211; \\frac{\\text{}\\text{180}}{\\text{}\\text{360}} \\times 0.75\\% \\right) = \\ 99.6250\\ \\]<\/span><\/p>\n<p>Step 2:<\/p>\n<p>From the PV obtained in Step 1, determine the Add-on Rate (AOR) for that specific money market asset:<\/p>\n<p><span class=\"math display\">\\[AOR = \\frac{\\text{Year}}{\\text{Days}} \\times \\left( \\frac{FV &#8211; PV}{PV} \\right)\\]<\/span><\/p>\n<p><span class=\"math display\">\\[AOR = \\frac{\\text{}\\text{365}}{\\text{}\\text{180}\\text{}} \\times \\left( \\frac{100 &#8211; 99.6250}{99.6250} \\right) = 0.763\\%\\]<\/span><\/p>\n<\/blockquote>\n\n\n<!-- BOTTOM CTA \u2013 Refined Version -->\n<div style=\"text-align:center; background-color:#f4f6f9; padding:35px 20px; border-radius:12px; margin-top:40px;\">\n\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n       display:inline-block;\n       padding:14px 34px;\n       background-color:#3b6fd8;\n       color:#ffffff;\n       border-radius:50px;\n       font-size:16px;\n       font-weight:600;\n       text-decoration:none;\n       margin-bottom:18px;\n     \">\n     Start Free Trial\n  <\/a>\n\n  <p style=\"max-width:700px; margin:0 auto; font-size:16px; line-height:1.6; color:#333;\">\n    Strengthen your CFA Level I fixed income skills with exam-style yield spread and money market instrument problems, clear explanations, and timed practice designed to improve calculation accuracy.\n  <\/p>\n\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>Money market instruments are short-term debt securities with original maturities of one year or less. They are a crucial part of the financial market and include a variety of instruments such as overnight sale and repurchase agreements (repos), bank certificates&#8230;<\/p>\n","protected":false},"author":12,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-46196","post","type-post","status-publish","format-standard","hentry","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Yield Spreads in Money Markets | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn how to measure and compare yield spreads for money market instruments using discount rates, add-on rates, and bond equivalent yield.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/yield-spread-measures-for-money-market-instruments\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Yield Spreads in Money Markets | CFA Level 1 - 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