Two Cash Flows, Many Money Market Rates
Suppose that a money market security can be purchased on January 12th for $64,000. The security matures on March 12th, paying $65,000. To review the money market calculations seen so far, let's calculate the interest rate on the security to the nearest one-tenth of a basis point, given the following quotation methods and day-count conventions:
- Add-on Rate, Actual/360
- Add-on Rate, Actual/365
- Add-on Rate, 30/360
- Add-on Rate, Actual/370
- Discount Rate, Actual/360
Note first that interest rate calculations are invariant to scale. That means you will get the same answers if you simply use $64 and $65 for the two cash flows. However, if you work for a major financial institution and are used to dealing with ...