This is an example from Schweser A $1 million negotiable CD with 120 days to maturity is quoted with an add-on yield of 1.40/0based on a 365-day year. Calculate the payment at maturity for this CD and its bond equivalent yield. Solution: The add-on interest for the 120-day period is 120 / 365 x 1.40/0= 0.46030/0. At maturity, the CD will pay $1 million x (1 + 0.004603) = $1,004,603. My doubt is: I did this to calculate the payment at maturity: $1 million x (1+0.014)^(120/365) Why am I wrong?
add on yield => does mean ( + Rate * 120 / 365) and not ^120/365…
Also note that short term instruments (less than 1 year to maturity) tend to use simple interest instead of compound interest.