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Can you please explain T-bills annualized yield and bank discount rate?

Hello everyone.

I don’t understand the difference between annualized yield and bank discount basis r(BD).

Why would we need r(BD), why we have to calculate it? Why r(BD) exist?

Why don’t we use annualized yield, instead?

Please explain like I’m 5. I did a research on investopedia but It’s still too hard for me to understand.

Thank you.

 

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The bank discount yield is the convention used to quote T-bill rates.  It’s a stupid convention, but it’s entrenched, so there’s nothing you nor I can do about it.

The annualized yield is the real (annual) yield that you’ll earn when you buy a T-bill and hold it to maturity.  If you want to compare a T-bill investment to another type of investment, you need a common yield measure; that’s what the annualized yield is.

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S2000magician wrote:

The bank discount yield is the convention used to quote T-bill rates.  It’s a stupid convention, but it’s entrenched, so there’s nothing you nor I can do about it.

The annualized yield is the real (annual) yield that you’ll earn when you buy a T-bill and hold it to maturity.  If you want to compare a T-bill investment to another type of investment, you need a common yield measure; that’s what the annualized yield is.

Thank you so much.

But, about the question number 2: “another type of investment” - you mean it’s not the money market instruments, right? Because, I thought if we wanted to compare T-Bills with money market instruments, we should use r(MM) ?