Sickening illness wrapping me again. Sucks.
Spent the day repeating the same cycle of sleeping, eating, taking medicine and sleeping again. I believe I'm in the progress of incubating pharmacophobia. Darn, should I take the red or the blue one today?
Whatever. Lying on my 5 years old spring mattress with flatten topper, digging some pointers of what to do to keep myself awake.
Oh yeah, I can continue reading up stuffs for CFA paper 1 preparation. The quantitative section should be interesting enough.
............ (Reading while half eye closed)
Although it is possible to restate the yield convention in money market yield, quoting yield on US T-bills is generally calculated based on bank discount basis. The author pointed out that quoted yield in bank discount basis has 3 potential issues: Firstly, the yield is based on face value of T-bills. It is more meaningful to express the return in term of amount invested. Secondly, bank convention of 360 days in a year is differ from usual calendar period calculation. And lastly when annualizing the yield, it is assuming a simple interest and this prevent the incorportation of interest on interest possibilities.
To do the conversion, use the following formula:
r(mm) = r(bd) x F/D
or if the face value (F) is not available,
r(mm)= 360 x r(bd) / (360 - t * r(bd))
Because US T-bills are guaranteed face value payment at maturity by US federal government, they are shielded from default risk. Large volume of T-bills transaction avoided liquidity risk and less than 1 year maturity excluded maturity risk. Thus T-bills are considered the safest short term debt instrument in US money market. But still T-bills will be affected by monetary policy on interest rate among other factors.
Effective annual yield, EAR = (1+HPY)^(365/t) - 1
In general calculation for NPV and IRR (or other time value of money methods), US T-bills yield is the baseline for establishing a reasonable discount rate or opportunity cost of capital.
............ (Continue next time.)
2 comments:
Wow, I can't belive a found this blog. I did a search on google to find the term that's used sarcastically for when you put a book under your pillow and you read it. I searched for "reading while sleeping."
I am also in the financial industry... currently a stockbroker. My colleague just got his CFA.
Anyways, we might have something in common... hit me up at: http://www.wallstreetknowitall.com.
Cheers. :)
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