Question

(2)       You invested in a 90 day CD from Citizens Bank on 3/31/17. It had a stated interest rate of 3.6%, and you invested $200,000 in the CD.

(a)       Calculate the payment due at maturity. 20 points

           

(b)       It is now 4/15/17. A broker offers you a price of 99.90 for the CD. If you sell the CD to the broker, what will be the proceeds that you will receive? 20 points

           

(c)       What is the money market yield on the security, given the price of 99.90 on 4/15/17? 10 points

  

Answer 1

Part A

At the time of maturity, principal along with interest will be payable.

Maturity Payment = principal + Interest

                                 = $200,000 + Principal x rate x time

                                  = $200,000 + $200,000 x 0.036 x 90/365

                                 = 200,000+ 1775.34

                                 = $201,775.34

Part B

Proceeds from CD = par value x % of price

                                  = $200,000 x 99.90%

                                  = $199,800

Part C

Yield on money market funds is for 7 days. Therefore, the yield would be

Yield = (P1/Po)^n -1

          = (200,000/199800)^(365/7) -1

          = 1.0536 -1

          = 5.36%

Therefore, annual yield would be 5.36%.