CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds
An analyst compares a money market instrument quoted on a discount rate basis with one quoted on an add-on rate basis. For the same price and maturity, the discount rate is most likely:
The discount rate is most likely lower than the add-on rate. Both measure the same dollar gain, but the discount rate divides it by face value, a larger base than the price used for the add-on rate, so it produces the smaller yield.
- Aequal to the add-on rate
- Blower than the add-on rateCorrect
- Chigher than the add-on rate
Explanation
The discount rate is computed on face value, which exceeds the price, while the add-on rate is computed on the lower price. The larger denominator in the discount rate calculation gives a smaller percentage, so the discount rate is lower than the add-on rate.
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