Money Market Yield
What Is the cash Market Yield?
The money market yield is that the rate of interest earned by investing in securities with high liquidity and maturities of but one year like negotiable certificates of deposit, U.S. Treasury bills, and municipal notes. market yield is calculated by taking the holding period yield and multiplying it by a 360-day bank year divided by days to maturity. It also can be calculated employing a discount rate yield.
The money market yield is closely associated with the CD-equivalent yield and bond equivalent yield (BEY).
KEY TAKEAWAYS
- The market yield is what money market instruments are
expected to return to investors.
- The money market involves the acquisition and sale of
huge volumes of very short-term debt products, like overnight reserves or cash
equivalent.
- An individual may invest within the market by
purchasing a market open-end fund, buying a Treasury bill, or opening a market
account at a bank.
Understanding the cash Market Yield
The money market is that the part of the broader financial markets that
deals with highly liquid and short-term financial securities. The market links
borrowers and lenders who are looking to transact in short-term instruments
overnight or for a few days, weeks, or months, but always but a year.
Active participants during this market include banks, market funds,
brokers, and dealers. samples of market securities include Certificates of
Deposit (CD), Treasury bills (T-bills), cash equivalent, municipal notes,
short-term asset-backed securities, Eurodollar deposits, and repurchase
agreements. To earn a market yield, it's thus necessary to possess a market
account. Banks, for instance, offer market accounts because they have to borrow
funds on a short-term basis to satisfy reserve requirements and to participate
in interbank lending.
Money market investors receive compensation for lending funds to
entities that require to satisfy their short-term debt obligations. This
compensation is usually within the sort of variable rate of interest s
determined by the present interest rate within the economy. Since market
securities are considered to possess low default risk, the cash market yield is
going to be less than the yield on stocks and bonds but above the interest
rates on standard savings accounts.
Calculating the cash Market Yield
Although interest rates are quoted annually, the quoted interest may
very well be compounded semi-annually, quarterly, monthly, or maybe daily. the
cash market yield is calculated using the bond equivalent yield (BEY) supported
a 360-day year, which helps an investor compare the return of a bond that pays
a coupon on an annual basis with a bond that pays semi-annually, quarterly, or
the other coupons.
The formula for the cash market yield is:
Money market yield = Holding period yield x (360/Time to maturity)
Money market yield = [(Face value – Purchase price)/Purchase price] x (360/Time to maturity)
For example, a T-bill with $100,000 face value is issued for $98,000 and
thanks to mature in 180 days. the cash market yield is:
= ($100,000 - $98,000/$98,000) x 360/180
= 0.0204 x 2
= 0.0408, or 4.08%
The money market yield differs slightly from the discount rate yield, which is computed on the face value, not the acquisition price. However, the cash market yield also can be calculated using the discount rate yield as seen during this formula:
Money market yield = discount rate yield x (Face value/Purchase price)
Money market yield = discount rate yield / [1 – (Face value – Purchase price/Face value)]
Where discount rate yield = (Face value – Purchase price)/Face value x (360/Time to maturity)
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