Question

I offer to borrow money from you for 90 days at the following interest rate quotations:

a discount rate of 5%.

a simple interest money market rate of 5.04%.

a “bond equivalent” yield (simple interest 365 day) rate of 5.11%.

Which is the better deal from your point of view? Explain your reasoning/method

Answer 1

Money to be borrowed for 90 days.

Option 1 = discount rate of 5%.

Borrowing at a discount rate of 5% will result in repaying after 90 days as follows:

5%/((1-(5%*90/360))) = 5.0633%

Option 2 = simple interest money market rateof 5.04% will remain same as 5.04% after 90 days

Option 3 = "bond equivalent” yield (simple interest 365 day) rate of 5.11%.

Borrowing at "bond equivalent” yield (simple interest 365 day) rate of 5.11%.will result in repaying after 90 days as follows:

5.11%*360/365 = 5.04%

As a lender, the interest rate I will get is highest at option 1 - discount rate of 5%. Hence I will opt to lend at discount rate of 5%.