Question

Treasury bill purchased in December 2016 has 140 days until maturity and a bank discount yield of 1.87 percent. Assume a $100 face value.

a. What is the price of the bill as a percentage of face value? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

b. What is the bond equivalent yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places.)

Answer 1

Answer a.

Discount Yield = [(Face Value - Current Price) / Face Value] * [360 / Days to Maturity]
0.0187 = [($100 - Current Price) / $100] * [360 / 140]
0.00727 = ($100 - Current Price) / $100
$0.727 = $100 - Current Price
Current Price = $99.273

Price as a percentage = Current Price / Face Value
Price as a percentage = $99.273 / $100
Price as a percentage = 0.99273 or 99.273%

Answer b.

Bond Equivalent Yield = [(Face Value - Current Price) / Current Price] * [365 / Days to Maturity]
Bond Equivalent Yield = [($100 - $99.273) / $99.273] * [365 / 140]
Bond Equivalent Yield = 0.007323 * 2.607143
Bond Equivalent Yield = 0.01909 or 1.909%