Question

Calculate the annual yield to maturity for the following two possible cash investments for your organization:

a. A 13-week U.S. Treasury bill with a par value of $100,000 selling for $99,750

b. A Repurchase Agreement with a maturity of 3 days, a face value of $100,000 selling for $99,990.

c. Discuss the different risks associated with each investment, considering the security of the investment as well as the different maturity of each investment. The discuss factors other than risk that might affect a decision to make one investment over the other.

Answer 1

Answer to Part a) Annual yield taking 52 week in a year Return for 13 weeks = 100,000-99750= 250 dollars on an investment of 99750 therefore return percentage = 250/99750* 52 weeks/13 weeks *100= 1.0025%

Answer to Part b) Annual yield taking 365 days in a year for repurchase agreement Return for 3 days = 100,000-99,990= 10 dollars for 3 days so annual return for 365 days = 10/99990 * 365/3 * 100 = 1.2167%

Answer to Part c) Comapring the return percentages of both Repurchase agreement looks better but we have to decide obn the basis of safety of investments, duration of investment and credit rating.

As per safety US treasury bills are safer as they are backed by US government. Duration wise Repurchase agreement is better as you get the return in just 3 days.

The other reason are credit rating of repurchase agreements invest only if they are rated good by the rating agencies as well as your preferences.