Money market yield (MMY) is the total return on money market instruments equal to the increase (decrease) in value of an instrument above (below) its purchase price plus any investment income based on a 360-day year, without compounding – essentially the holding period yield (HPY) adjusted to a 360-day basis. The quoted yield on pure discount money market instruments, such as T-bills, is made comparable to the add-on yield (AOY) quoted on interest-bearing money market instruments paying interest on a 360-day basis, where HPY is holding period yield ((P – F)/P) and t is the number of days remaining to maturity:
MMY = [(P – F)/P] x (360/t) = HPY x (360/t)
MMY = (360 x BDY)/[(360 – t) x BDY)]
Because MMY does not account for the effect of compounding and discounts the total return on a linear basis, money market yield is not directly comparable to bond yields compounded semiannually or annually.
MMY is a true yield based on the investment’s lower price, which makes it greater than an investment’s BDY. MMY is also greater than the HPY since HPY is not annualized and is based on a holding period of less than a year.