I found this q in schwesers mock exam 2010 : A 180-day U.S. Treasury bill has a holding period yield (HPY) of 2.375%. The bank discount yield (in %) is closest to : A. 4.640. B. 4.750. C. 4.875. And My answer is B, since bank discount yeild = (HPY) ×(360/t) = .02375 × (360 / 180) = 0.0475. But Schweser answer is A… I think its wrong, anyone knows how its A ? This is their answer : Then use the money market yield to find the bond discount yield: rMM = (360 rBD) / ((360 – (t)( rBD)). In this case: 0.0475 = (360 rBD) / ((360 – (180)( rBD)). Now solve for rBD. 0.0475 × ((360 – (180)( rBD) = (360 rBD). 17.10 = (360 rBD) + 8.55 rBD. rBD = 17.10 / 368.55 = 0.046398.
HPY * 360/t is the money market yield. not the bank discount yield. the formula for the bank discount yield is Discount/Face value * (t/360) you have to go from money market to bank discount using their formula. thats why A is correct.