Question

Suppose that a commercial bank wants to buy Treasury bills. These instruments pay ​$6,000 in one year and are currently selling for ​$6,100. The yield to maturity of these bonds is negative 1.64−1.64​%. ​(Round your response to two decimal​ places.) Is this a typical​ situation? A. Yes. Often​ times, investors and banks will choose to pay more than the face value of a discount bond. It is more convenient to hold Treasury bills or keep their funds as deposits at the central bank because they are stored electronically. B. No. In normal times banks will not choose to pay more than the face value of a discount​ bond, since that implies negative yields to maturity.

Answer 1

Answer:

B. No. In normal times banks will not choose to pay more than the face value of a discount​ bond, since that implies negative yields to maturity.

Explanation:

There is no bank that would like to pay more for treasury bills or bonds.  Banks are profit-maximizing organizations and as a result are always investing in profitable ventures and transactions and not in loss-making transactions as in this example.  Banks would have preferred to buy the instruments for $5,900 or less so that they could earn some interest when the instrument is repaid with the face value of $6,000.