1. If a six- month Treasury bill is purchased for $ 0.9675 on a dollar ( i. e. $ 96 750 for a $

QUESTION

1. If a six- month Treasury bill is purchased for $ 0.9675 on a dollar ( i. e., $ 96,750 for a $ 100,000 bill), what is the discount yield, the annual rate of interest, and the compound rate? What will these yields be if the discount price falls to $ 0.94 on a dollar ( i. e., $ 94,000 for a $ 100,000 bill)?
Solution: 1. Discount yield = (1 purchase value ) / 1 * 12 / T bill period = (1 0.9675) / 1 * 12 / 6 = 6.50% Annual rate of return =(1 purchase value ) / Purchase value* 12 / T bill period =(1 0.9675) / 0.9675* 12 / 6 = 6.718% Compound rate =(1+(1 purchase value ) / Purchase value)^n 1 = (1+(1 0.9675) / 0.9675)^2 -1 = 6.831% 2. If Discount price falls: Discount yield = (1 purchase value ) /

1 * 12 / T bill period = (1 0.94) / 1 * 12 / 6 = 12% Annual rate of return =(1 purchase value ) / Purchase value* 12 / T bill period =(1 0.94) / 0.94* 12 / 6 = 12.77% Compound rate =(1+(1 purchase value ) / Purchase value)^n 1 = (1+(1 0.94) / 0.94)^2 -1 = 13.17%

ANSWER:

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