Question

A company issues a bank-accepted bill to fund a short-term business project. The bill is issued for 180 days, with a face value of $1,750,000 and a yield of 9.25% per annum. What amount will the company raise to fund the project?

After 110 days, the bank bill is sold by the original discounter into the secondary market for $1,700,350. The purchaser holds the bill to maturity. What is the yield received by:

1. the original discounter of the bill?

2. the holder of the bill at the date of maturity?

Answer 1

Solution:

a)Calculaton of amount raised by the company:

=Face Value*days in a year/(Days in a year+Yield rate*days to maturity)

=$1,750,000*365/365+(0.0925*180)

=$638,750,000/381.65

=$1,673,653.87

Thus amount raised by the company is $1,673,653.87

b)Calculation of Yield received by original discounter

Yield=(Sale value-Face value/Face value)365/no. of days for which bill was held

=[($1,700,350-$1,673,653.87)/$1,673,653.87]*365/110

=0.0529 or 5.29% p.a

c)Calculation of Yield received by original discounter

Yield=($1,750,000-$1,700,350/$1,700,350)*365/70

=0.1523 or 15.23% p.a