Question

An investor whose investment horizon is less than 1 year bought a 182-day Tbill on the secondary market with 150-days to maturity at a price of GHS 255,000. The face value of the Tbill is GHS 270, 000.

i. Calculate the annualized discount yield on the T’bill
ii. What is the interest equivalent yield on this investment?

Answer 1

Solution i) Days-to-maturity = 150 days

Price of the T-bill =  GHS 255,000

Face value of the T-bill = GHS 270,000

The T-bill is bought at a discount of = (Face Value - Price of the T-bill)/Face Value

= (270,000 - 255,000)/270,000 = 5.5556% = 5.56%

Annualized discount yield = Discount*360/Days-to-matuirty

= 5.5556%*360/150 = 5.5556%*2.4 = 13.33%

Solution ii) Holding Period Yield (HPY) = (Face Value - Purchase Price)/Purchase Price

= (270,000 - 255,000)/255,000 = 5.8824%

Bond equivalent yield (Interest equivalent yield) = Holding Period Yield*365/days-to-matuirty

Bond equivalent yield = 5.8824%*365/150 = 0.143138 = 14.31%