Question

Use the following information from the Wall Street Journal to answer questions 1 and 2.

(A) 90-day Commercial Paper 0.250%

(B) 90-day Negotiable CD 0.250%

(C) 90-day Bankers’ Acceptance 0.320%

(D) 90-day T-bill 0.100%

2. Calculate the bond equivalent yield (investment yield) for each of the four investments (A) through (D) on the previous page. (5 points)

(A)

(B)

(C)

(D)

Answer 1

A) 1.015%

Explanation:

First using financial calculator to calculate, the present value.

Inputs: N=90

I/y= 0.250%/90 = 0.0028%

Pmt= 0

Fv= 1,000

Pv= compute

We get, the purchase price as $997.5032

BEY= Face value - purchase price/purchase price × (365/days to maturity)

= 1,000 - 997.5032 / 997.5032 × (365/90)

= 2.4968 / 997.5032 × (4.0556)

= 0.0025 × 4.0556

= 0.0102 or 1.015%

B) 1.015%

Explanation: Same calculation as done in A, because the values are same.

C) 1.30%

Explanation:

Using financial calculator to find present value

Inputs: N= 90

I/y= 0.320% / 90 = 0.0036%

Pmt= 0

Fv= 1,000

Pv= compute

We get, purchase price of bankers acceptance as $996.8052

BEY= Face value - purchase price / purchase price × (365/ days to maturity)

= 1,000 - 996.8052 / 996.8052 × (365/90)

= 3.1948 / 996.8052 × (4.0556)

= 0.0032 × 4.0556

= 0.0130 or 1.3%

D) 0.41%

Explanation:

First, Using financial calculator to calculate the present value.

Inputs: N= 90

I/y= 0.100% / 90 = 0.0011%

Pmt= 0

Fv= 1,000

Pv= compute

We get, purchase price of t-bill as $999.0005

BEY= face value - purchase price / purchase price × 365/days to maturity

= 1,000 - 999.0005 / 999.0005 × (365/90)

= 0.9995 / 999.0005 × (4.0556)

= 0.0010 × 4.0556

= 0.0041 or 0.41%