Question

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.

Answer 1

Sol:

Face value (FV) = $1,000

Purchase price T-Bill A = $988.40

Purchase price T-Bill B = $987

Days to Maturity T-Bill A = 91 - 10 = 81 days

Days to Maturity T-Bill B = 91 days

T bill yield A = [(Face value - Purchase price) / Face value] * (360 / Days to Maturity)

T bill yield A = [(1,000 - 988.40) / 1,000] * (360 / 81)

T bill yield A = (11.6 / 1,000) * 4.44

T bill yield A = 0.0116 * 4.44 = 0.0516 or 5.16%

T bill yield B = [(Face value - Purchase price) / Face value] * (360 / Days to Maturity)

T bill yield B = [(1,000 - 987) / 1,000] * (360 / 91)

T bill yield B = (13 / 1,000) * 3.96

T bill yield B = 0.013 * 3.96 = 0.0516 or 5.14%

Yield on T-Bill A is higher than yield on T-Bill B. Higher yield means T- Bill is more risky and chances of default is more. Lower yield of T-Bill B means low default risk. If you want to avert risk then you should buy T-Bill B on the other hand if you want higher return with a degree of risk then buy T-Bill A.