Question

3. The treasurer of a large corporation wants to invest $14 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 6.46 percent; that is, the EAR for this investment is 6.46 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 are the bond equivalent and discount yields on this investment?

Answer 1

Answer:

Bond equivalent yield is 6.66%

Discount yield is 6.46%

Explanation:

The formula for bond equivalent yield is as follows:

Bond Equivalent Yield = ((Par Value - Price) / Price) * (365 / d) * 100

Par value is $14 million

Price =Par value -interest

where interest amount=amount invested*days of investment *interest rate/360 days

interest amount=14,000,000*6.46%*92/360

                         =$231,124.44

Price =$14,000,000-$231,124.44

price= $13,768,875.56  

Bond equivalent yield=(14,000,000-13,768,875.56)/13,768,875.56 *365/92

                                    =6.66%

discount yield=discount/face value*360days/days of investment

                       =231,124.44/14000000*360/92

                       =6.46%