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A financial instrument has a face value of $10,000 and is presently trading for $8800. If...

A financial instrument has a face value of $10,000 and is presently trading for $8800. If the instrument expires in 36 months and has no coupon, find the annual yield to investors using the money market yield convention

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Answer #1

Face Value (F) = $10,000

Current Price (P) = $8,800

Time to maturity = 36 months = 3 years = 3*365 days = 1095 days

For this bond, the Holding Period Return (HPR), that is, return that investor get for holding the bond until maturity = F/P -1

HPR = 10000/8800 -1 = 1.136364 - 1 = 0.136364 = 13.64% (approx.)

Money Market Yield (rmm) = HPR * (360/t) ................ (where t= number of days until maturity)

rmm = 0.136364 * (360/1095) = 0.136364 * 0.328767 = 0.044832 = 4.48% (approx.)

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