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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A 90-day money market instrument is quoted on a discount rate basis at 4.00% using a 360-day year. Its face value is 100. The add-on rate for the same instrument, using a 360-day year, is closest to:

The add-on rate is closest to 4.04%. The price is 99.00 per 100 of face value, so the 90-day return is 1.0101%, which annualizes to 4.04% on a 360-day basis. The discount rate is lower because it is measured on face value rather than price.

  1. A3.96%
  2. B4.00%
  3. C4.04%Correct

Explanation

Price = 100 × (1 − 0.04 × 90/360) = 99.00. Add-on rate = (100/99 − 1) × 360/90 = 0.010101 × 4 = 4.04%. The discount rate understates the yield because it is based on face value, not price.

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