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Simple Interest (Money Market) Formula

In some markets (such as the US and Germany), bond yields during the final coupon period are calculated on a simple interest basis rather than using compound interest. When only one payment is outstanding, the appropriate formula for bond price (PPH) is:

 

Equation Template

 

P = dirty price (clean price plus accrued interest) of the bond per 100 units face value.

ym = annual money market yield (simple interest)

c = annual percentage coupon rate

h = number of coupon periods in a year

d = number of days to redemption (using an "Actual" day count convention)

a = number of days in a year (using appropriate day count convention)

 

The simple interest yield can also be computed for bond functions when there is more than one payment outstanding. This is done for comparison purposes as part of the sovereign bond equivalent yield functions, as well as the generic bond functions (all four) which can value a bond using simple interest in every period. Simple interest valuations are based on the following equation:

 

Equation Template

 

DFi = the discount factor for the i'th payment =

DFi = Equation Template

DF1 = 1

 

See Also

Money Market Instrument Pricing

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