3. The treasurer of a large corporation wants to invest $14 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 6.46 percent; that is, the EAR for this investment is 6.46 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 92 days, what are the bond equivalent and discount yields on this investment?

Bond equivalent yield is 6.66%

Discount yield is 6.46%

Explanation:

The formula for bond equivalent yield is as follows:

Bond Equivalent Yield = ((Par Value - Price) / Price) * (365 / d) * 100

Par value is $14 million

Price = Par value - interest

where interest amount=amount invested*days of investment * interest rate/360 days

interest amount=14,000,000*6.46%*92/360

=$231,124.44

Price = $14,000,000-$231,124.44

price = $13,768,875.56

Bond equivalent yield = (14,000,000-13,768,875.56) / 13,768,875.56 * 365/92

=6.66%

discount yield=discount/face value*360days/days of investment

=231,124.44/14000000*360/92

=6.46%