Question

Current T-bill yields are approximately 2 percent. Assume an investor considering the purchase of a newly issued three-month T-bill expects interest rates to increase within the next three months and has a required rate of return of 2.5 percent. Based on this information, how much is this investor willing to pay for a three-month T-bill?

Answer 1

Answer:

$9,937.89

Explanation:

The computation is shown below:

Given that

Current T-bill yield rate = 2%

Required rate of return = 2.5%

Time period = 3 months

We assume the face value be $10,000

So the willing to pay amount for a three month T- bill is

= Face value ÷ (1 + required rate of return × given months ÷ total months)

= $10,000 ÷ (1 + 2.5% × 3 months ÷ 12 months )

= $10,000 ÷ (1 + 0.625%)

= $9,937.89