1215

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) 9.00%.

B) 1.01%.

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.

1215

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) 5.06%.

C) 4.93%.

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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

1215

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) 4.26%.

C) 3.95%.

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

1215

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) 9.60%.

B) 1.00%.

C) 9.00%.

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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%.

1215

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

A) 5.6%.

B) 6.1%.

C) 5.8%.

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