Question

The Treasury Department auctioned $10 billion in 3-month bills in denominations of $10,000 at a discount rate of 3.000%. What would be the effective rate of interest?

Answer 1

Discount rate = 3%

Effective Interest Rate = [ 1 + (Nominal Interest Rate / Number of Compounding Periods) ] ^ (Number of compounding periods) - 1]

Compounding period will be quarterly as bills are for 3 months. Hence number of compounding periods = 4.

Effective Interest Rate = [ 1 + (3%/4) ] ^ (4) - 1

Effective Interest Rate = 1.0075 ^ 4 - 1

Effective Interest Rate = 1.030339 - 1

Effective Interest Rate = 3.0339%