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CFA Level I · CFA Level I Exam · Working Capital and Liquidity

A firm invests $2,000,000 in a bank time deposit for 90 days at a quoted rate of 4.80% on a 360-day basis. Its tax-free investment alternative is a 90-day instrument priced at a 365-day bond-equivalent yield. The time deposit's interest at maturity and its yield restated on a 365-day basis are closest to:

Interest is $24,000 and the 365-day yield is about 4.87%. The quote uses a 360-day year, so interest is 2,000,000 × 4.80% × 90/360. Restating to a 365-day year multiplies the rate by 365/360, raising it from 4.80% to 4.87%.

  1. AInterest $24,000; yield 4.87%Correct
  2. BInterest $24,000; yield 4.74%
  3. CInterest $23,671; yield 4.80%

Explanation

Interest = 2,000,000 × 4.80% × 90/360 = $24,000. Converting a 360-day rate to 365 days: 4.80% × 365/360 = 4.867%, about 4.87%. The 4.74% option wrongly multiplies by 360/365, and the $23,671 option wrongly uses 365 days for interest on the quoted basis.

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