I have a question regarding
Bank Discount Yield and
Money Market Yield for US TBill.
Some books mentioned that
Bank Discount Yield is not a meaningful measure of the return for the TBill because:
- The yield is calculated based on face value, not purchase price.
- The yield is annualized into 360 days, not 365 days.
- The yield is based on simple interest and ignores compouding.
The book also suggests that
Money Market Yield is superior to the
Bank Discount Yield because it is computed relative to the purchase price, not the face value.
I don't understand this because the equation of calculating
Money Market Yield is:
(360 x R) / (360 - t x R)
R is the
Bank Discount Yield,
t is the holding period.
I think the
Money Market Yield is solely calculated from
Bank Discount Yield. It is not calculated from the actual purchase price.
Bank Discount Yield cannot be used to measure the return, why the
Money Market Yield can?