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The treasurer of a large corporation wants to invest $44 million in excess short

ID: 2649983 • Letter: T

Question

The treasurer of a large corporation wants to invest $44 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.56 percent; that is, the EAR for this investment is 3.56 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 121 days, what are the bond equivalent and discount yields on this investment? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

  
Bond equivalent yield   %
Discount yield   %

Explanation / Answer

Current Price = $ 44 million

Par Value or Face Value = 44*(1+3.56%)^(121/365)

Par Value or Face Value = $ 44,51321 Million

Bond equivalent yield = (Face Value - Current Price)/Current Price * 365/ No of Days to maturity

Bond equivalent yield = (44.51321 - 44)/44 * 365/121

Bond equivalent yield = 3.52%

Discount yield =  (Face Value - Current Price)/Current Price * 360/ No of Days to maturity

Discount yield = (44.51321 - 44)/44 * 360/121

Discount yield = 3.47%

Answer

Bond equivalent yield = 3.52%

Discount yield = 3.47%