Question

A Treasury bill with 113 days to maturity is quoted at 98.630. What are the bank discount yield, the bond equivalent yield, and the effective annual return

Answer 1

Answer:

The bank discount yield is 4.36%

The bond equivalent yield is 4.49%

The effective annual return is 4.56%

Explanation:

In order to calculate the bank discount yield we would have to make the following calculation:

bank discount yield=(Face Value-Purchae price)/Face Value)*(360/days)

bank discount yield=($100-98.630)/$100)*360/113

bank discount yield=4.36%

The bank discount yield is 4.36%

In order to calculate the bond equivalent yield we would have to make the following calculation:

the bond equivalent yield=(Face Value-Purchase price)/Purchase price)*(365/days)

the bond equivalent yield=($100-98.630)/$98.630)*365/113

the bond equivalent yield=4.49%

The bond equivalent yield is 4.49%

In order to calculate the effective annual return we would have to make the following calculation:

effective annual return=1+(Face Value-Purchase price)/Purchase price)∧(365/days)-1

effective annual return=1+($100-98.630)/$98.630)∧365/113-1

effective annual return=4.56%

The effective annual return is 4.56%