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

An analyst compares a 90-day commercial paper quoted at a discount rate of 2.40% with a 90-day certificate of deposit quoted at an add-on rate of 2.40%, both on a 360-day year. Which statement is most accurate?

The commercial paper has the higher effective yield. A 2.40% discount rate is applied to face value, so the investment outlay is lower than face, making the true return 0.6036% over 90 days versus 0.60% for the add-on CD. Matching quoted rates do not mean matching yields.

  1. AThe two instruments offer identical yields because the quoted rates match.
  2. BThe commercial paper has the higher effective yield because the discount rate is applied to face value.Correct
  3. CThe certificate of deposit has the higher effective yield because the add-on rate is applied to the amount invested.

Explanation

Commercial paper: price = 1 − 0.024×0.25 = 0.994, so yield = 0.006/0.994 = 0.6036% per 90 days. CD yield is 0.024×0.25 = 0.60%. Since the discount base is the lower price, the paper's effective yield is higher.

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