A Treasury bill with 146 days to maturity is quoted at 97.540. What is the bank

Question

A Treasury bill with 146 days to maturity is quoted at 97.540. What is the bank discount yield, the bond equivalent yield, and the effective annual return? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places. Omit the "%" sign in your response.)

A Treasury bill with 146 days to maturity is quoted at 97.540. What is the bank discount yield, the bond equivalent yield, and the effective annual return? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Formula for discount yield ;

Current T bill price = Face Value [1-( days to maturity/360 )*Discount yield]

Let the discount yield =d.

So, 97.540=100[1-146/360*d]

Or, 97.540=100(1-0.4055d)

Or, 97.540= 100-40.55d

Or, 40.55d=2.46

Or, d=6.06

So Discount Yield =6.06%

Bond Equivalent Yield =BEY = (365*discount yield)/(360-days to maturity*discount yield)

Or, BEY= 365*0.0606/(360-146*0.0606)

=22.11/351.15=6.296%

So Bond Equivalent Yield = 6.296%

Effective Annual return =EAR

Formula 1+EAR=[1+ BEY/m]m

M= no of periods =365/146=2.5 here

So, 1+EAR =[1+0.06296 /2.5]2.5

Or, 1+EAR= (1.025)2.5

Or, 1+EAR=1.06

Or EAR =0.06=6%

So effective annual return =6%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.