Question

New 3 month T-Bill. Par %10,000 sold for $9700. What's the yield?

You need a 3% return on a $10,000 1 year T-bill. What price are you willing to pay?

The max maturity for Commercial Paper (CP) is 270 days. Why might a firm issue CP if it has need of funds for a longer time?

Answer 1

1). To find the YTM, we need to put the following values in the financial calculator:

INPUT	1		-9,700	0	10,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT		3.09

So, r = 3.09%

Hence, YTM = 4 x r = 4 x 3.09% = 12.37%

2). To find the price, we need to put the following values in the financial calculator:

INPUT	1	3		0	10,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-9,708.74

Hence, Bond's Price = $9,708.74

3). The firm may be unwilling to lock in the prevailing long-term yield on bonds, perhaps because it expects that long-term interest rates (and yields offered on new bonds) will decline in the near future.