Question

An investor buys a 90 day T-bill at a bank discount quote of 4.86. The investor's actual annual rate of return on this investment was ______. (Can you please show the formula/ work )

A. 4.99%

B. 23.00%

C. 18.19%

Answer 1

Step-1, Net Proceeds from T-Bill

T-Bill Face Value = $10,000

Bank Discount Quote = 4.86% per year

Net Proceeds = $10,000 x [1 – (0.0486 x 90/360)]

= $10,000 x [1 - 0.012150]

= $10,000 x 0.987850

= $9,878.50

Step-2, Return on Investment

Return on Investment = [(Face Value / Net Proceeds) – 1] x 365Days/90Days

= [($10,000 - $9,878.50) – 1] x 365/90

= [1.012299438 – 1] x 365/90

= 0.012299438 x 365/90

= 0.049881055

= 4.99% (Rounded to 2 decimal places)

“Therefore, the Return on Investment would be (a). 4.99%”