What it means
Treasury bills are awkward creatures. They are sold at a discount and quoted by that discount, so the number on the screen is not the return you earn, and it is computed on a 360-day year.
Comparing a bill with a certificate of deposit or any other yield-quoting instrument therefore requires translation. The money market yield is that translation: it converts the discount figure into an annualised return on the price actually paid.
The conversion matters because the discount basis flatters nothing and confuses everyone. A bill quoted at a 5 percent discount does not earn 5 percent on the money invested; it earns slightly more, because the return is measured against the discounted purchase price, not the face value.
University finance courses, such as New York University's Stern materials on Treasury bill yield calculations, drill exactly this conversion, because misreading discount quotes as yields is one of the oldest errors in the money markets. A second conversion sometimes follows.
Comparing against bonds requires yet another restatement, the bond-equivalent yield, which puts the same instrument on a 365-day year, so a single bill can honestly wear three different numbers. The 360-day convention survives by tradition.
Money market instruments inherited the convention from commercial banking, so the money market yield keeps comparisons honest within the family, even though bonds use 365 or actual days. For a business owner parking surplus cash, the practical use is comparison.
A treasury team weighing bills against deposits or commercial paper should convert everything to the same yield basis before ranking, because the instrument with the highest quoted number is not always the one that pays the most.
In practice
Real-world examples.
Example
A treasurer compares a 180-day Treasury bill quoted at 4.8 percent discount with a deposit paying 4.9 percent. The bill's money market yield converts to about 4.92 percent, so the bill is marginally the better-paying option.
Example
A trainee in a bank's dealing room misreads a discount quote as a yield and recommends the wrong instrument. Her supervisor makes her recompute every quote on the money market basis for a month.
Example
A family office standardises its cash dashboard on CD-equivalent yield. Bills, deposits and commercial paper finally line up in one column, and the weekly cash meeting gets shorter.
Formula
Calculation
Money market yield = (360 x bank discount yield) / (360 - days to maturity x bank discount yield). A 90-day bill at a 4.8 percent discount yield converts to (360 x 0.048) / (360 - 90 x 0.048) = 0.0486, about 4.86 percent, before any further adjustment to a 365-day bond-equivalent basis.
Worked example from the price side: a 90-day bill with a face value of $1,000,000 is quoted at a 4.8% discount. The discount is $1,000,000 x 4.8% x 90 / 360 = $12,000, so the price paid is $988,000. The return over 90 days is $12,000 / $988,000 = 1.2146%, and annualised on a 360-day year that is 1.2146% x 360 / 90 = 4.86%, matching the formula. On a 365-day bond-equivalent basis the figure is about 4.86% x 365 / 360 = 4.93%.Case study
Seen in the real world.
In this illustrative fictional case, Dagmar manages liquidity for a Scandinavian exporter with large dollar balances. Her bank offers a deposit at 4.7 percent; her broker offers bills at a 4.6 percent discount. On quoted numbers the deposit wins, but Dagmar converts the 270-day bill to its money market yield of 4.76 percent and buys the bills. Over a year of rolling the position, the conversion earns the firm an extra $30,000 on a $50 million balance. Her CFO, reviewing the policy, orders every future comparison done on one yield basis, and the quoted number is never again trusted on its own in the firm's cash policy.
Watch out
Common mistakes.
- Reading a discount quote as a yield, when the discount basis understates the return on the price actually paid and must be converted before comparison.
- Comparing instruments on different day-count bases, when 360-day money market figures and 365-day bond figures are not directly comparable without conversion. A two-basis-point error per comparison compounds across a year of rolling positions.
- Assuming the highest quoted number pays the most, when quote conventions differ so much between bills, deposits and paper that unconverted rankings are meaningless.
Questions
People also ask.
Why is it called CD-equivalent yield?
Because it restates a discount-quoted instrument's return in the same terms a certificate of deposit uses: simple interest on the amount invested, annualised on a 360-day year, making the two directly comparable. The two names refer to the same conversion.
Why a 360-day year?
Money market conventions inherited the 360-day year from commercial banking practice. It survives in bill and commercial paper calculations even though bonds and deposits elsewhere use 365 or actual days. The shortcut also made hand calculation easier in the era before computers.
How does it differ from bond-equivalent yield?
Money market yield uses the 360-day year and suits comparisons among money market instruments. Bond-equivalent yield converts to a 365-day basis for comparison with coupon-paying bonds.
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