Can someone please explain the difference between Bank Discount Yield and Money Market Yield? I understand the MMY is annualized Holding Period Yield, which differs from Bank Discount Yield through the use of Price Recieved rather than Face Value.
What I am unclear on is how you can calculate Holding Period Yield without knowing what the eventual price to be received is? If you are calculating this prior to purchase, do you just use Face Value? … and if you do, (going back to my original question) what is the difference between Bank Discount Yeild and Money Market Yield?
Also, why would Price Received differ from Face Value in any case? Is it because you sell it before maturity?
Thanks, S2000magician, your articles are helpful and you definitely know your stuff.
Maybe I should narrow my question a touch. How does Price Received (under Holding Period Yield) differ from Face Value (under Bank Discount Yield)? The only way I could see they would differ is if you don’t hold to maturity… Is that right?
Consider th below formula which I use for my calculation
Holding Period Yield = [(Cash inflow + any Dividend/Interest)- Cash outflow(Which you have paid to get the instrument] / Cash outflow(Which you have paid to get the instrument]
Now What I understand from your question is you want to know the diference between cash outflow and Face value
The difference is under bank discount yield we consider the instrument as Zero Discount bond ( which means you pay only the net amount and after a period you will get the face value.
In HPY use the net value as Denominator ( as this will tell you how much you actually invested and earned money on it)
In BDY use face value as Denominator ( as this will let us know what is the basic bank interest rates- Mostly used as Repos)
That makes a lot of sense. Thank you. I wasn’t getting the distintiction that the denominator is kind of “before the fact” on HPY and “after the fact” on BDY, but that helps a lot.
