Chapter 28. Money Market Calculations

STEVEN V. MANN, PhD

Professor of Finance, Moore School of Management, University of South Carolina

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: The money market is the market for short-term debt instruments. Short-term debt is traditionally defined as having original maturities of one year or less. Some of these instruments are interest bearing while others are discount instruments. Moreover, many of these securities calculate interest based on a 360-day year while others use a 365-day year. There are some essential money market calculations including day count conventions and basic formulas of price/yield one needs to know to understand how the money market works.

Keywords: day count convention, day count basis, actual/actual, actual/360, 30/360, yield on a bank discount basis, CD equivalent yield, bond-equivalent yield, effective annual yield

The purpose of this chapter is to introduce some of the fundamental calculations used every day in the money market. First, we will introduce day count conventions used in markets around the world. In addition, we will discuss the basic formulas for price/yield for both discount and interest-bearing securities.

DAY COUNT CONVENTIONS

To those unfamiliar with the workings of financial markets, it may come as a shock that there is no widespread agreement as to how many days there are in a year. The procedures used for calculating the number of days between ...

Get Handbook of Finance: Financial Markets and Instruments now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.