Question

A $17,000 T-bill is purchased at a 2.75% discount rate for 20 weeks. Find the effective rate of interest to the nearest hundredth of a percent.

Answer 1

Note: 20 weeks = 20/52 or 5/13 of a year.

Let E = effective rate of interest

E = [1 + (r/m)]^m - 1 where r is the nominal (annual ) advertised rate; m is the number of compounding periods/year.

Let r = 0.0275

Let m = 5/13

Plug into formula and do the math.