optiix

A Treasury bill (T-bill) with 38 days until maturity has a bank discount yield of 3.82%. Which of the following is closest to the money market yield on the T-bill?

A) 3.81%.

B) 3.87%.

C) 3.84%.

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The formula for the money market yield is: [360 × bank discount yield] / [360 − (t × bank discount yield)]. Therefore, the money market yield is: [360 × 0.0382] / [360 − (38 × 0.0382)] = (13.752) / (358.548) = 0.0384, or 3.84%.
Alternatively: Actual discount = 3.82%(38 / 360) = 0.4032%.
T-Bill price = 100 − 0.4032 = 99.5968%.
HPR = (100 / 99.5968) − 1 = 0.4048%.
MMY = 0.4048% × (360 / 38) = 3.835%.

optiix

A Treasury bill has 40 days to maturity, a par value of $10,000, and was just purchased by an investor for $9,900. Its holding period yield is closest to:

A) 1.01%.

B) 9.00%.

C) 1.00%.

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The holding period yield is the return that the investor will earn if the bill is held until it matures. The holding period yield formula is (price received at maturity − initial price + interest payments) / (initial price) = (10,000 − 9,900 + 0) / (9,900) = 1.01%. Recall that when buying a T-bill, investors pay the face value less the discount and receive the face value at maturity.

optiix

A Treasury bill (T-bill) with a face value of $10,000 and 137 days until maturity is selling for 98.125% of face value. Which of the following is closest to the bank discount yield on the T-bill?

A) 4.56%.

B) 4.93%.

C) 5.06%.

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The formula for bank discount yield is: (D / F) × (360 / t). Actual discount is 1 − 0.98125 = 0.01875. Annualized is: 0.01875 × (360 / 137) = 0.04927

optiix

What is the yield on a discount basis for a Treasury bill priced at $97,965 with a face value of $100,000 that has 172 days to maturity?

A) 2.04%.

B) 3.95%.

C) 4.26%.

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($2,035 / $100,000) × (360 / 172) = 0.04259 = 4.26% = bank discount yield.

optiix

A Treasury bill has 40 days to maturity, a par value of $10,000, and is currently selling for $9,900. Its effective annual yield is closest to:

A) 1.00%.

B) 9.00%.

C) 9.60%.

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The effective annual yield (EAY) is based on a 365-day year and accounts for compound interest. EAY = (1 + holding period yield)365/t − 1. The holding period yield formula is (price received at maturity − initial price + interest payments) / (initial price) = (10,000 − 9,900 + 0) / (9,900) = 1.01%. EAY = (1.0101)365/40 − 1 = 9.60%.

optiix

The bank discount of a $1,000,000 T-bill with 135 days until maturity that is currently selling for $979,000 is:

A) 6.1%.

B) 5.8%.

C) 5.6%.

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($21,000 / 1,000,000) × (360 / 135) = 5.6%.

optiix

An investor has just purchased a Treasury bill for $99,400. If the security matures in 40 days and has a holding period yield of 0.604%, what is its money market yield?

A) 5.650%.

B) 5.512%.

C) 5.436%.

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The money market yield is the annualized yield on the basis of a 360-day year and does not take into account the effect of compounding. The money market yield = (holding period yield)(360 / number of days until maturity) = (0.604%)(360 / 40) = 5.436%.

optiix

The effective annual yield (EAY) for a T-bill maturing in 150 days is 5.04%. What are the holding period yield (HPY) and money market yield (MMY) respectively?

A) 2.04%; 4.90%.

B) 5.25%; 2.04%.

C) 2.80%; 5.41%.

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The EAY takes the holding period yield and annualizes it based on a 365-day year accounting for compounding. The HPY = (1 + 0.0504)150/365 = 1.2041 − 1 = 2.04%. Using the HPY to compute the money market yield = HPY × (360/t) = 0.0204 × (360/150) = 0.04896 = 4.90%.

optiix

A Treasury bill, with 80 days until maturity, has an effective annual yield of 8%. Its holding period yield is closest to:

A) 1.72%.

B) 1.70%.

C) 1.75%.

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The effective annual yield (EAY) is equal to the annualized holding period yield (HPY) based on a 365-day year. EAY = (1 + HPY)365/t − 1. HPY = (EAY + 1)t/365 − 1 = (1.08)80/365 − 1 = 1.70%.

optiix

The holding period yield for a T-Bill maturing in 110 days is 1.90%. What are the equivalent annual yield (EAY) and the money market yield (MMY) respectively?

A) 6.90%; 6.80%.

B) 6.44%; 6.22%.

C) 5.25%; 5.59%.

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The EAY takes the holding period yield and annualizes it based on a 365-day year accounting for compounding. (1 + 0.0190)365/110 − 1 = 1.06444 − 1 = 6.44%. Using the HPY to compute the money market yield = HPY × (360 / t) = 0.0190 × (360 / 110) = 0.06218 = 6.22%.