The cash manager for Wicker Enterprises is investigating the purchase of a banker’s acceptance (BA). The $1,000,000 face value BA has 150 days to maturity and is quoted at 4.05% on a discount-basis yield. If Wicker’s marginal tax rate is 25%, then the money market yield on the BA is closest to: A. 3.09%. B. 3.13%. C. 4.12%. D. 4.18%.
C Discount = 16 875, so price = 983 125 so HPY = .017 MMY = 0.017 * (360/150) = 0.04119
4.05% discount basis yield means the discount from face value is $40500 for the full year. Over 150 days this is 150/360 * 40500 or $16875 . therefore the money market yield is [16875/(1000000-16875)] * 360/150= 4.12% C
Thanks.
Found a better solution: MMY = (360 * BDY)/[360 - (t*BDY)] Gives you the same answer with much less work. Hell of a formula though.
One more thing to remember is that MMY is always greater than DY. So you can easily rule out options A & B
x/1000000*360/150=.0405 x=16875 Now MMY = HPY*360/150 So 16875/(1000000-16875)*360/150 = .041195 or 4.12% C