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CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments

A portfolio manager wants to compare a 60-day commercial paper quote with a 270-day bank certificate of deposit quote. Which approach is most appropriate for comparing their yields?

The manager should convert both quotes to the same yield basis and annualize them with the same compounding assumption. Money market instruments use different conventions and maturities, so raw quotes such as discount rates or holding period returns are not directly comparable.

  1. AConvert both to the same yield basis and annualize them with the same compounding assumptionCorrect
  2. BCompare the discount rates directly because both use a 360-day year
  3. CCompare the holding period returns directly because they are already annualized

Explanation

Money market instruments use different quoting conventions and maturities, so yields must be put on a common basis and annualization method. Discount rates are based on face value and are not comparable to add-on rates, and holding period returns are not annualized.

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