Key Takeaways
- Annualized yield for short-term discount instruments.
- Uses purchase price and 360-day year basis.
- Higher than discount yield, lower than bond equivalent yield.
What is Money Market Yield?
Money Market Yield (MMY), also known as CD equivalent yield, is an annualized return measure for short-term, low-risk discount instruments like Treasury bills and commercial paper. It uses a 360-day year to standardize yields, making comparisons across money market securities straightforward. MMY converts the discount— the difference between the face value and purchase price—into a simple annual percentage without compounding.
This yield differs from other calculations such as bond equivalent yield or discount yield, providing a clear basis to evaluate short-term obligations. Understanding MMY is essential for investors focusing on liquidity and capital preservation in the money market.
Key Characteristics
Money Market Yield offers a practical framework to assess returns on discount securities. Key features include:
- Simple annualization: Uses a 360-day year for ease of comparison across instruments.
- Based on purchase price: Unlike discount yield, MMY divides by purchase price, providing a more accurate reflection of investor return.
- Short-term focus: Most applicable to securities maturing within 182 days, aligning with the M1 money supply liquidity concept.
- Non-compounded: MMY does not account for interest compounding, differing from bond equivalent yield.
- Widely used in money markets: Critical for evaluating Treasury bills, commercial paper, and certificates of deposit.
How It Works
MMY calculates yield by dividing the discount by the purchase price, then annualizing it using a 360-day convention. The formula is:
MMY = (Discount ÷ Purchase Price) × (360 ÷ Days to Maturity)
This approach standardizes returns for securities sold at a discount, such as Treasury bills. For example, if you buy a bill at less than its face value, MMY captures the effective return over its short maturity.
Unlike bond yields that compound interest and use a 365-day year, MMY assumes simple interest, making it a straightforward tool to compare various money market instruments. This method is especially helpful when evaluating short-term debt compared to long-term bonds like those tracked in bond ETFs.
Examples and Use Cases
MMY is crucial for investors managing short-term cash or seeking safe, liquid options. Common scenarios include:
- Government securities: Calculating yields on Treasury bills helps investors assess risk-adjusted returns relative to other short-term obligations.
- Corporate commercial paper: Companies like BND issue short-term notes, and MMY aids in comparing these to government instruments.
- Money market funds: While funds report 7-day SEC yields, MMY remains a benchmark for evaluating underlying discount instruments.
- Portfolio management: Investors may use MMY alongside tools like best bond ETFs to balance short-term liquidity and yield.
Important Considerations
While MMY provides clarity for short-term yield comparison, it does not incorporate compounding, which can understate actual returns on securities held to maturity. Additionally, its reliance on a 360-day year may slightly differ from other annualization methods used in longer-term investments.
When analyzing investments, consider MMY as a baseline for evaluating short-term instruments but complement it with other yield measures for a comprehensive view. This approach ensures more informed decisions in managing cash, debt, or short-duration portfolios.
Final Words
Money Market Yield offers a standardized way to compare short-term discount instruments by annualizing returns on a 360-day basis. To make informed investment choices, calculate the MMY for your options and compare yields across similar securities before committing funds.
Frequently Asked Questions
Money Market Yield (MMY) is an annualized return measure for short-term, low-risk discount instruments like Treasury bills and commercial paper. It uses a 360-day year convention and simple interest to standardize yields for easy comparison.
MMY is calculated by dividing the discount (face value minus purchase price) by the purchase price, then multiplying by 360 divided by the days to maturity. This formula annualizes the return without compounding.
The 360-day year is a standard convention in money markets that simplifies interest calculations. MMY uses this basis to maintain consistency and comparability across short-term discount instruments.
Discount yield uses the face value as the denominator, which tends to understate the return. MMY uses the purchase price instead, providing a more accurate annualized return on discount securities.
Bond Equivalent Yield (BEY) adjusts MMY by multiplying it by 365/360 to reflect a 365-day year and provide a comparable bond yield. As a result, BEY is slightly higher than MMY.
Money Market Yield primarily applies to individual discount instruments and differs from yields on money market funds, which focus on net income annualized over 365 or 360 days, such as the 7-day SEC yield.
MMY helps investors compare returns on various short-term, low-risk instruments like Treasury bills, CDs, and commercial paper by providing a standardized annualized yield. This aids in assessing liquidity, safety, and return across options.
If you buy a 90-day Treasury bill with a face value of $30,000 for $29,400, the discount is $600. Using the formula, MMY = (600 / 29,400) × (360 / 90) = 8.16%, representing the annualized return.
