Question

1. Determine whether a $100,000, 3-month T-Bill selling at $97,645 or a 10%, semi-annual coupon bond selling at par has the greater effective annual return

Answer 1

The 10% semi-annual coupon bond selling at par has the greater effective annual return than the $100,000, 3-month T-Bill selling at $97,645.

Data and Calculations:

T-Bill:

Face value of T-Bill = $100,000

Present value of the T-Bill = $97,645

Effective yield rate = 9.65% ($2,355/$97,645 x 100 x 12/3)

Bond:

Face value of bond =$100,000

Interest = 10% semi-annual

Present value of the bond = $104,761.90

Effective yield rate = 9.80%

Thus, the 10% semi-annual coupon bond selling at par has the greater effective annual return than the $100,000, 3-month T-Bill selling at $97,645.

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