We started with Holding Period Return and worked through Bank Discount Yield, Money Market 360-day Yield, Money Market 365-day Yield, and APY. We showed that using the same inputs for current price and maturity value, you could get different answers for each quotation method.

Explain the three issues behind why the quotation methods yield different results?

Money Market interest rate quotations:

Simple interest rate = (Pn - Po) / Po

Bank Discount Yield (BDY) = {(Pn - Po) / Pn}*{360/n}

Money Market 360 day yield = {(Pn - Po) / Po}*{360/n}

Money Market 365 day yield = {(Pn - Po) / Po}*{365/n}

True (effective) yield (APY) = {1 + [(Pn - Po) / Po]/(365/n)}^365/n - 1