Question

You can purchase a T-bill that is 70 days from maturity for $17,465. The T-bill has a face value of $17,500.

a.	Calculate the T-bill’s quoted yield. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

T-bill’s quoted yield

%

b.	Calculate the T-bill’s bond equivalent yield. (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

T-bill’s bond equivalent yield

%

c.	Calculate the T-bill’s EAR. (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

T-bill’s EAR

%

Answer 1

a. Calculate the T-bill’s quoted yield.

Quoted yield = D/F * 365/t

Where

D = dollar discount from face value = 17500-17465 = 35

F = face value = 17500

t = days until maturity (taking 360 days in a year) = 70

Quoted yield = (35/17500) * 365/70

= 1.043%

b. Calculate the T-bill’s bond equivalent yield.

bond equivalent yield= ((Par Value – Purchase Price) / Purchase Price) * (365 / Days to Maturity)

=((17500-17465)/17465)*(365/70)

= 1.045%

c. Calculate the T-bill’s EAR

EAR= (1+ bond equivalent yield/no. of compounding periods per year)^no. of compounding periods per year -1

=(1+0.01045/(365/70)^(365/70)-1

=1.00200410959^(365/70)-1

= 1.01049422465 - 1

= 1.049%