What is Money Market Discount Rate ?
Money Market Discount Rate is a crucial metric for evaluating the annualized return on short-term debt instruments sold at a discount. Unlike bonds that pay periodic interest (coupons), many money market instruments are sold at a discount to their face (par) value and mature at face value. The difference between the purchase price and the face value represents the interest earned by the investor. The discount rate on T-bills often serves as a benchmark for other interest rates in the economy, including rates on commercial paper, certificates of deposit, and other short-term instruments. Central banks, such as the Federal Reserve, closely monitor and influence short-term interest rates, including discount rates, as part of their monetary policy to control liquidity and inflation in the economy. Understanding the discount rate helps investors compare the returns on different short-term instruments and make informed investment decisions.
How to Calculate Money Market Discount Rate?
Money Market Discount Rate calculator uses Money Market Discount Rate = (Year/Days of Maturity)*(Face Value of Money Market Instrument-Present Value of Money Market Instrument)/Face Value of Money Market Instrument to calculate the Money Market Discount Rate, Money Market Discount Rate represents the annualized percentage discount at which these instruments are issued or traded compared to their face value. Money Market Discount Rate is denoted by MMDR symbol.
How to calculate Money Market Discount Rate using this online calculator? To use this online calculator for Money Market Discount Rate, enter Year (YR), Days of Maturity (DM), Face Value of Money Market Instrument (FV_{MM}) & Present Value of Money Market Instrument (PV) and hit the calculate button. Here is how the Money Market Discount Rate calculation can be explained with given input values -> 0.475472 = (7/5)*(53-35)/53.