Question

You would like to purchase a T-bill that has a $17,500 face value and is 60 days from maturity. The current price of the T-bill is $17,375. Calculate the discount yield on this T-bill.

Answer 1

Solution :

Calculation of the T-bill’s quoted discount yield:                   

B. The formula for calculation of discount yield of a T-Bill when the No. of days in a year = 365

= [ (Face value – Current Price)/ Face value ] * ( 365 / No. of days to maturity )

As per the Information given in the question we have

Face Value = $ 17,500   ; Current Price = $ 17,375    ; No. of days to maturity = 60

Applying the above values in the formula we have

= [ ( 17500 – 17375 ) / 17500 ] * ( 365/60 )

= ( 125 / 17500 ) * 6.083333

= 0.007143 * 6.083333

= 0.0435 = 4.35 %

B. The formula for calculation of discount yield of a T-Bill when the No. of days in a year = 360

= [ (Face value – Current Price)/ Face value ] * ( 360 / No. of days to maturity )

As per the Information given in the question we have

Face Value = $ 17,500   ; Current Price = $ 17,375    ; No. of days to maturity = 60

Applying the above values in the formula we have

= [ ( 17500 – 17375 ) / 17500 ] * ( 360/60 )

= ( 125 / 17500 ) * 6

= 0.007143 * 6

= 0.0429 = 4.29 %

Thus the T-Bill’s Discount yield when the No. of days in a year is 365 is = 4.35 %

Thus the T-Bill’s Discount yield when the No. of days in a year is 360 is = 4.29 %