Question

Ch30 Q8

A three-month Treasury bill and a nine-month bill both sell at a discount of 11%.

a-1. Calculate the annual yield of the three-month Treasury bill. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Annual yield             %_________________

a-2. Calculate the annual yield of the nine-month Treasury bill. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Annual yield             %_____________-

b. Which bill offers the higher annual yield?

-	Nine-month Treasury bill
-	Three-month Treasury bill

Answer 1

Treasury Bill Yield=(Face Value-Purchase Price)/Purchase Price

Let assume face value of Treasury Bill is $100

thus purchase price=Face value-discount

=$100-11% of $100

=$89

a)Calculation of annual yield of the three-month Treasury bill

Yield=($100-$89/$89)*100

=12.36%

Annual Yield %=Yield*12 month/month to maturity

=12.36%*12/3

=49.44%

Thus,annual yield of the three-month Treasury bill is 49.44%

b)Calculation of annual yield of the nine-month Treasury bill

Yield will be same as of 3 month treasury bill.

Annual Yield %=12.36%*12/9

=16.48%

Thus,annual yield of the nine-month Treasury bill is 16.48%

c)3-month Treasury bill offers higher annual yield i.e 49.44%.