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The treasurer of a large corporation wants to invest $24 million in excess short

ID: 2780304 • Letter: T

Question

The treasurer of a large corporation wants to invest $24 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.16 percent; that is, the EAR for this investment is 3.16 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 92 days, what is the percentage discount yields on this investment?

Explanation / Answer

Discount yield = ( (par value - current value) / par value ) * (360 / n)

Current value = 100 / (1 + 0.0316)92/365 = 99.22

Discount yield = ( ( 100 - 99.22) / 100) * (360 / 92) = 0.030564 = 3.056%