BOND MATH: The Theory Behind the Formulas

Money Market Add-on Rates

There are two distinct ways that money market rates are quoted: as an add-on rate and as a discount rate. Add-on rates generally are used on commercial bank loans and deposits, including certificates of deposit, repos, and fed funds transactions. Importantly, LIBOR is quoted on an add-on rate basis. Discount rates in the U.S. are used with T-bills, commercial paper, and bankers acceptances. However, there are no hard-and-fast rules regarding rate quotation in domestic or international markets. For example, when commercial paper is issued in the Euromarkets, rates typically are on an add-on basis, not a discount rate basis. The Federal Reserve lends money to commercial banks at its official “discount rate.” That interest ...