Money Market Discount Rates
Treasury bills, commercial paper, and bankers acceptances in the U.S. are quoted on a discount rate (DR) basis. The price of the security is a discount from the face value.
Here, PV and FV are the two cash flows on the security; PV is the current price and FV is the amount paid at maturity. The term in brackets is the amount of the discount—it is the future (or face) value times the annual discount rate times the fraction of the year. Interest is not “added on” to the principal; instead it is included in the face value.
The pricing equation for discount rate instruments expressed more compactly is:
Suppose that the ...
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