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The treasurer of a large corporation wants to invest $15 million in excess short

ID: 2753956 • Letter: T

Question

The treasurer of a large corporation wants to invest $15 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 6.55 percent; that is, the EAR for this investment is 6.55 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 108 days, what are the bond-equivalent and discount yields on this investment?

Explanation / Answer

The Final price of money market investment after 108 days=$15 million *(1.0655)(108/365)

=1.0189498338779632214127861770125* $15 million

=$15.2842475 million

money market yield on this instrument=((15.2842475 -15)/15) *(360/108)=0.0632=6.32%

bond-equivalent yield=(365/360)*6.32 %=6.40 percent

discount yield=((15.2842475 -15)/15.2842475) *(360/108)=0.062=6.20%