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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:
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%. |
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