Question

A person purchased a 90-day maturity, $100,000 par value Treasury bill for $98,000.

a. Calculate the annualized bank discount yield paid by the treasury bill.

b. If you sell the bill for $99,000 after one month, what is your holding period yield?

Answer 1

Maturity Period = 90days

Par value Treasury bill = $100,000

Discounted Purchase Price = $98,000

Discount = $100,000 -  $98,000 = $2,000

a) Calculation of annualized bank discount yield paid by the Treasury Bill

Discount yield = (Discount /Par value) * (360/ Days remaining to maturity)

Discount yield = ($2000 /$100,000) * (360/ 90)

Discount yield = 0.02 * 360 / 90

Discount yield = 0.08 or 8%

b) Calculation of holding period yield, if you sell the bill for $99,000 after one month

Holding period yield = (P1 - P0) / P0
where P1 = sale value of T-bill
Po = purchase value of T-bill  

Holding period yield = ($99,000 - $98,000) / * $98,000

Holding period yield = $1,000 / $98,000 = 0.010204

Holding period yield = 0.010204 or 1.02%