Bank discount yield (BDY) is the annualized discount rate expected from the face value of a money market instrument on a 360-day simple interest basis (i.e., without compounding) expressed as a percentage of the instrument’s face value to be received at maturity. It is the common convention used for quoting pure discountmoney market instruments. Because BDY is not based on the investment’s purchase price, it is not a true yield. The BDY formula is, where F is face value, P is purchase price, D is discount, and t is the number of days remaining to maturity:
BDY = [(F – P)/F] x (360/t) = (D/F) x (360/t)
Bank discount yield is not a true yield because it is a rate based on face value instead of purchase price – the actual cost of the investment.
