Consider a money market instrument with 50 days to maturity and a quoted ask price of 98. Which two of the following statements are correct as they relate to this instrument?
I. The bond equivalent yield is an effective annual rate.
II. The bank discount rate is lower than the bond equivalent yield.
III. The bank discount rate is an effective annual rate.
IV. The bond equivalent yield is lower than the effective annual rate.
A)I and II only
B)I and III only
C)I and IV only
D)II and III only
E)II and IV only

Question

Quizplus · Accepted Answer

The bank discount rate is typically lower than the bond equivalent yield because it is based on the face value rather than the purchase price. The bond equivalent yield is lower than the effective annual rate because it does not account for compounding within the year.

Consider a Money Market Instrument with 50 Days to Maturity