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Question:

Jane Acompora is calculating equivalent annualized yields based on the 1.3% holding period yield of a 90-day loan. The correct ordering of the annual money market yield (MMY), effective yield (EAY), and bond equivalent yield (BEY) is:

A MMY < BEY < EAY.
explanation

1212No calculations are really necessary here since the MMY involves no compounding and a 360-day year, the BEY requires compounding the quarterly HPR to a semiannual rate and doubling that rate, and the EAY requires compounding for the entire year based on a 365-day year. A numerical example of these calculations based on a 90-day holding period yield of 1.3% is: the money market yield is 1.3% x 360 / 90 = 5.20%, the bond equivalent yield is , which is two times the effective semiannual rate of return, and the effective annual yield is . Calculating the semiannual effective yield using 180 days instead of 182.5 does not change the order.

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