• Global Frameworks: CFA Level 1 (Fixed Income), Federal Reserve Bank of New York Reference Rates.

1. Treasury Bills (T-Bills) and Interest Rate Formats
Treasury bills are short-term debt instruments issued by sovereign governments to fund immediate fiscal needs. They do not pay periodic coupons; instead, they are issued at a discount to their face value and mature at full par value.
  • Bank Discount Yield (BDY): T-bills are quoted in the market using this yield convention, which calculates returns based on a 360-day year and face value:

    r_BDY = (D / F) × (360 / t)Where D = dollar discount (Face Value – Purchase Price), F = face value, and t = days remaining to maturity.
    • Structural Flaw: BDY understates an investor’s true return because it uses face value instead of the actual cash invested, and relies on a 360-day year rather than 365 days.

  • Holding Period Return (HPR): The actual un-annualized return earned over the asset’s lifespan:

    HPR = (F − P) / P
  • Money Market Yield (CD Equivalent Yield): Standardizes the return to allow direct comparison with certificates of deposit:

    r_MM = (360 × r_BDY) / (360 − (t × r_BDY)) = HPR × (360 / t)
  • Bond Equivalent Yield (BEY): Annualizes the HPR using a 365-day year, allowing direct comparison with coupon-paying corporate bonds:

    r_BEY = HPR × (365 / t)

2. Commercial Paper (CP) and Certificates of Deposit (CD)
  • Commercial Paper: Short-term, unsecured promissory notes issued by highly rated corporations to fund seasonal working capital needs or bridge financing. In the US, CP maturities are legally capped at 270 days to avoid formal SEC registration requirements.
  • Negotiable Certificates of Deposit: Large-denomination, interest-bearing time deposits issued by commercial banks that can be traded in secondary markets before maturity.

3. Repurchase Agreements (Repos) and Reference Benchmarks
A Repurchase Agreement (Repo) is a transaction where one party sells a high-quality security (usually government bonds) to a counterparty while agreeing to buy it back at a higher price on a specific future date (often overnight). Structurally, a repo functions as a secured loan, with the price difference representing the interest paid on the loan (The Repo Rate). The lender applies a Haircut—a percentage reduction in the recognized value of the collateral asset—to protect against market price drops.
Following global benchmark reforms, traditional interbank offered rates have been replaced by risk-free reference rates derived from actual transactions:
                  ┌─────────────── Global Reference Rates ────────────────┐
                  ▼                                                       ▼
         [SOFR (United States)]                                 [ESTR (Eurozone)]
   Secured Overnight Financing Rate;                      Euro Short-Term Rate;
   Based on Treasury repo transactions.                   Based on unsecured overnight
PreviousNext