Question

Assume a US government treasury bill has 122 days until it matures and there are 365 days in the year. Assume a par value of $1,000. the bid bank discount rate is 4.95% and the asked bank discount rate is 4.93%.

a) What is the current price of the bill?

b) Using the above information, what is the effective annual yield?

c) There is a treasury bond with a par value equal to $1,000. The bond has 1 year remaining to expiration and pays coupon payments every 6 months at an annual rate of 8%, which is the same as the prevailing interest rate on similar bonds. Which one offers the most attractive yield for you?

Answer 1

a) Current price:

FV	1000
Time(in years)	0.334247
Discount rate= Bid rate	4.95%
Current price	983.9809

b) Effective annual yield:

Time(in years)	0.334247
Discount rate= Bid rate	4.95%
Current price	983.9809
FV	1000
Yield(for 0.334247 year)	1.63%
Effective annual yield	4.87%

c) The one offering coupon is more attractive. Since Money has time value any cash flow realized earlier is better than same amount receiving in later point of time. Additionally, the coupon earned can be reinvested and interest can be earned on it.