What are the different money market yield conventions and how do I convert between them?

Money market instruments (T-bills, commercial paper, repos) use different yield quotation conventions than bonds. The three main conventions are discount yield, add-on yield, and bond equivalent yield.

1. Discount Yield (Bank Discount Basis)

Used primarily for US Treasury bills. The yield is calculated as a percentage of FACE VALUE, not purchase price, and assumes a 360-day year.

Discount Yield = (FV - Price) / FV x (360 / Days)

Example: Ashworth Capital buys a 90-day T-bill at $99.25 per $100 face:

DY = (100 - 99.25) / 100 x (360 / 90) = 0.0075 x 4 = 3.00%

Problem: This understates the true return because (a) the investment is $99.25, not $100, and (b) a year has 365 days, not 360.

2. Add-On Yield (Money Market Yield)

Calculated on the purchase price (actual investment), still using a 360-day year.

Add-On Yield = (FV - Price) / Price x (360 / Days)

Using the same T-bill:

MMY = (100 - 99.25) / 99.25 x (360 / 90) = 0.007557 x 4 = 3.023%

Higher than the discount yield because the denominator (Price) is smaller than Face Value.

3. Bond Equivalent Yield (BEY)

Converts the money market yield to be comparable with semiannual-coupon bond yields. Uses a 365-day year and the actual purchase price.

BEY = (FV - Price) / Price x (365 / Days)

BEY = (100 - 99.25) / 99.25 x (365 / 90) = 0.007557 x 4.0556 = 3.064%

Conversion Summary:

Quick Conversion Formulas:

MMY from Discount Yield:

MMY = (360 x DY) / [360 - (Days x DY)]

MMY = (360 x 0.03) / [360 - (90 x 0.03)] = 10.8 / 357.3 = 3.023%

BEY from MMY:

BEY = MMY x (365/360) = 3.023% x 1.01389 = 3.064%

Exam Tip: Discount yield is always the lowest because it uses the largest denominator (face value) and shortest year (360 days). BEY is always the highest because it uses actual investment and a 365-day year. If the exam asks you to rank yields from lowest to highest: Discount < Add-On < BEY.

Practice money market calculations in our CFA Level I question bank.