Question

Suppose you observe that a t bill which has 120 days left to maturity is quoted by the asked BDY of 2.4%. and bid BDY of 2.5%. At what discount from par this t bill can be bought?

Answer 1

The buying price of the T-Bill for an Investor is equivalent to the asked BDY of the T-Bill dealer. Hence, the discount rate for the T-Bill will have to be calculated using the asked BDY rate.

Asked BDY = [(F-P) / P] x (360/d) where d is the number of days to maturity, F is the T-Bill Par Value and P is the T-Bill Price.

Therefore, 0.024 = [(F-P) / P] x (360/120)

{(F-P)/P} = 0.024 / 3 = 0.08 or 8 %

Hence, the T-Bill can be bought at a discount of 8 % from par.