Money Market Yield (MMY) is an annualized yield calculation used for money market instruments, reflecting the return on a discount basis investment over a 360-day year.
Money Market Yield (MMY) is a standardized method to express the annualized return of short-term money market instruments, such as Treasury bills, commercial paper, and certificates of deposit, which are typically sold at a discount rather than paying periodic interest. MMY annualizes the yield based on a 360-day year, a convention in money markets, enabling investors to compare yields across different instruments with varying maturities and discount rates. This yield measure is important because it translates a discount or holding period return into a comparable annual rate. In practice, Money Market Yield is calculated using the instrument's purchase price, par value, and days to maturity. MMY differs from other yield conventions such as the Bond Equivalent Yield by its basis for annualizing the yield, providing a more appropriate reflection for short-term discounted securities traded in money markets. Wealth managers use MMY to assess and report the yield performance of holdings in short-term fixed income instruments within portfolios.
Understanding Money Market Yield is critical when structuring liquidity and short-term fixed income allocations within a family office portfolio. Since money market instruments are often used to preserve capital and maintain liquidity, accurately comparing yields on a consistent annualized basis helps optimize cash management strategies. The MMY metric aids in reporting and benchmarking returns on short-term investments, influencing decisions around rollover timing and instrument selection. From a tax perspective, knowing the MMY supports tax planning, since the nature of discount instruments and their yield recognition can affect both taxable income reporting and timing. Furthermore, governance and compliance frameworks benefit from MMY’s standardized yield calculation to ensure transparent and comparable financial reporting for stakeholders.
Suppose a Treasury bill with a face value of $100,000 is purchased for $98,000 and matures in 180 days. The discount is $2,000. The holding period yield is $2,000 / $98,000 = 0.02041 or 2.041%. To annualize this using MMY: MMY = (Discount / Purchase Price) * (360 / Days to Maturity) MMY = (2000 / 98000) * (360 / 180) = 0.02041 * 2 = 0.04082 or 4.082% This represents the annualized money market yield, allowing for comparison with other short-term instruments.
Bond Equivalent Yield
Bond Equivalent Yield (BEY) is another annualized yield measure that converts money market instrument yields into a bond basis, typically using a 365-day year and semi-annual compounding conventions. Unlike MMY, BEY facilitates comparison between discount instruments and coupon bonds, making it favored for longer-term investments. While MMY uses a 360-day year and simple annualization, BEY adjusts for the payment frequency and actual calendar year, which can result in a slightly higher yield figure than MMY for the same instrument.
How is Money Market Yield different from the bond equivalent yield?
Money Market Yield (MMY) annualizes yield using a 360-day year and simple interest based on purchase price and discount, suitable for short-term discount instruments. Bond Equivalent Yield (BEY) annualizes yield on a 365-day year and adjusts for compounding, converting short-term yields into a bond basis for better comparison with coupon-bearing bonds.
Why is Money Market Yield calculated on a 360-day basis instead of 365 days?
The 360-day basis is a market convention in money markets for simplification and standardization. It facilitates uniform yield calculations across various instruments, although it slightly overstates the yield compared to a 365-day basis. This convention aligns with common banking and commercial practices.
Can Money Market Yield be used to compare long-term and short-term investments?
Money Market Yield is specifically designed for short-term discount securities and is less appropriate for long-term investments, which are better compared using yields like Yield to Maturity or Bond Equivalent Yield that account for different compounding and payment structures.
