Question

In: Finance

You find two investments: 1) a T-BILL with a Face value of 10.000 $ and 120...

You find two investments:

1) a T-BILL with a Face value of 10.000 $ and 120 day until maturity with a current price of 96.5 and

2) 260 days to maturity a price of 92.8 and a Face Value of 10,000 $.

Questions:

Calculate the 4 different money market yields for both instruments.

Which of the two money market instruments will you choose? Justify your decision

Expert Solution

Four different types of money market yields are :

Bank Discount Yield (BDY)

Formula: (D/F)*(360/t) Where D=Amount of discount, F= Face Value, t= No. of days till maturity

Holding Period Yield (HPY)

Formula: (P₁-P₀+D₁)/P₀ Where P₁= Amount received on maturity, P₀ = Purchase price and D₁= Interest received on maturity

Effective Annual Yield (EAY)

Formula: [(1+HPY)^(365/t])-1

Money Market Yield (MMY)

Formula: (Face Value-Purchase Price)*360/time to maturity

Security: T Bill with Face Value $10,000. Time to maturity 120 days. Current Price 96.5

Current Price @96.5= (96.5/100)*10,000= $9,650. Amount of discount= $10,000-$9,650= $350

Annualized Bank Discount Yield= (350/10,000)*(360/120)= 0.105= 15.5% (Rounded)

Holding Period Yield= (10000-9650+0)/9650= 350/9650= 0.03626943 = 3.62% (Rounded)

Effective Annual Yield= [(1+0.3627)^(365/120)]-1= (1.3627^3.041667)-1= 0.114457= 11.45% (Rounded)

Money Market Yield= (10000-9650)/9650*360/120=350/9650*360/120=0.108808=10.88% (Rounded)

Security: Face Value $10,000. Time to maturity 260 days. Current Price 92.80

Current Price @92.80= (92.8/100)*10,000= $9,280. Amount of discount= $10,000-$9,280= $720

Annualized Bank Discount Yield= (720/10,000)*(360/260)= 0.099692 =9.97% (Rounded)

Holding Period Yield= (10000-9280+0)/9280= 720/9280= 0.077586 = 7.76% (Rounded)

Effective Annual Yield= [(1+0.0776)^(365/260)]-1= (1.11062)-1= 0.11062= 11.06% (Rounded)

Money Market Yield= (10000-9280)/92800*360/260= 720/9280*360/280= 0.099754=9.98% (Rounded)

Selection of security:

Holding period yield pertain to the holding period and does not take care of annualized effect. Except that, all other measures indicate higher yield on security 1 (T Bill). Hence the same will be chosen.

jeff jeffy answered 4 months ago

6. (1) A 13 weeks T-bill with a face value of $100,000 was sold at an...

6. (1) A 13 weeks T-bill with a face value of $100,000 was sold at an annual interest rate of 3% on Monday, August 31. If you purchase it on August 31, how much was the purchase price? 2. If you hold the T-bill until maturity (November 30,2020), how much will you receive from U.S. Treasury department on maturity date? How much is your annual effective interest rate? 3. If the annual interest rate drops to 2% 4 weeks later...

you buy a $1 million face value 180 day t-bill at a discount yield of 6...

you buy a $1 million face value 180 day t-bill at a discount yield of 6 percent. What is the price of the bill?, What is the simple interest yield on the bill?, Suppose you sold the bill after 30 days at a price of $977,000 what is your holding period?, What is your profit or loss if you financed the bill with a 30 day term repo at repo rate of 5.5%? assume the bill will be sold at...

You would like to purchase a T-bill that has a $17,500 face value and is 60...

You would like to purchase a T-bill that has a $17,500 face value and is 60 days from maturity. The current price of the T-bill is $17,375. Calculate the discount yield on this T-bill.

How much would you pay for a 6-month T-bill with a face value of $12,500 and...

How much would you pay for a 6-month T-bill with a face value of $12,500 and a rate that would yield 3.5% if there is 125 days remaining in the term

A T-bill that is 180 days from maturity with a face value of $100,000 is selling...

A T-bill that is 180 days from maturity with a face value of $100,000 is selling for $98,850. (A) Calculate the discount yield, bond equivalent yield, and EAR on the T-bill. (B) Calculate the discount yield, bond equivalent yield, and EAR on the T-bill if it matures in 150 days.

Question 2 (8 marks) A T-bill quote sheet has 98-day T-bill (Face value: $10,000) quotes with...

Question 2 A T-bill quote sheet has 98-day T-bill (Face value: $10,000) quotes with a 3.86% bid and a 3.83% ask rates. (a) Calculate purchase price of the bill. (b) Calculate the corresponding bond equivalent yield. (c) Prices of zero-coupon bonds reveal the following pattern of interest rates: Years from now 1-year interest rate 0 5.2% 1 7.3% 2 8.6% Calculate: i) 2-year interest rate on today and 3-year interest rate on today. ii) 1-year forward rate 3 years from...

A T-bill that matures 40 days from today has a price of $9,978. If the bill has a face value of $10,000, what is the T-bill discount rate (/yield)?

A T-bill that matures 40 days from today has a price of $9,978. If the bill has a face value of $10,000, what is the T-bill discount rate (/yield)?0.05210.02170.01980.0152

You have been offered a U.S Treasury Bill. The Face value of the bill is $10,000,...

You have been offered a U.S Treasury Bill. The Face value of the bill is $10,000, and the price is $8,925.The bill matures in 1/2 year. Compute the YTM using both discrete and continuously compounded interest on excel

If a 91-day T-Bill (bill-A) with face value Rs.1000, issued exactly 10 days ago, is trading...

If a 91-day T-Bill (bill-A) with face value Rs.1000, issued exactly 10 days ago, is trading at Rs.988.40 and a T-Bill (bill-B) issued today is trading at Rs.987.00. (Assume actual/360 day-counting convention) Find the yields of bill-A and bill-B. Which one shall you buy? Cite reason.

Brittany purchased a 182-day T-bill with interest rate of 3.75% p.a. and a face value of...

Brittany purchased a 182-day T-bill with interest rate of 3.75% p.a. and a face value of $10,000. a. How much did Brittany pay for the T-bill? Round to the nearest cent b. After 36 days, Brittany sold the T-bill when the interest rate for this T-bill in the market increased to 4.00% p.a. What was the selling price?