Question

ash manager Ken Johnson just picked up the financial newspaper and is having trouble understanding the jargon. He notices that a recent Treasury auction of 13-week Treasury bills, the lowest price bid for $10,000 bills was 97.569 percent of par.

Discount yield on securities?

coupon equivalent yield?

annual effective yield?

Comment on the relationship between the results you got in the problems a through c.

Answer 1

Discount Yield = (Par Value - purhcase price) / Par Value * 360/days to maturity

= (1000 - 9,756.9)/1000 *360/(13*7) = 9.61%

Coupon equivalent yield = Interest paid/ purchase price *365/ days to maturity

= 243.1/9,756.9* 365/91 = 9.99%

Annual effective yeild = (1+return%/period)*period

Return = 243.1/9,756.9*100 = 2.49%

= (1+2.49%/13)^54 = 10.89%

Discount yeield is based on the par value while the other are based on purchase price.

Also, only effective yield assumes reinvestment, that's why its the highest among the three.