Assume the interest rate on a Treasury bill is 2 percent and will pay its owner

Question

Assume the interest rate on a Treasury bill is 2 percent and will pay its owner $1000.00 when it matures in one year.
a.What is the price of the treasury bill in today's market.
b.Suppose that the Fed engages in open market sales which results in the interest rate on new one-year Treasury bills rising to 3 percent. What will happen to the price of these existing Treasury bills with rates of 2 percent? Why?

Explanation / Answer

i.Ans) => 1000/[1+(2/100)] = 980.3921. ii.Ans) => 1000/[1+(3/100)] = 970.8737. -The price of these existing Treasury bills with rates of 2% will fall -Because initially it was 3% when compared to now it is 2%, as there is decrease in %,the price of the bill also decreases

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