Question

A $10,000 UST one-year note sold at 1.5% discount would provide what effective yield: _____ A $10,000 three-month UST bill sold at 1.5% would provide what annualized effective yield: ________ Which instrument in the Capital market is the largest portion of the pie? _______________ What is meant by the Separation Theory in Finance: ___________

Answer 1

1)

A $10,000 UST one-year note sold at 1.5% discount
Therefore, the value paid today is :
10000 x 98.5% (A)      =		$        9,850
Maturity value given as (B) =	$      10,000
Absolute yield (B - A)   =		$           150
Therefore, Effective Yield (%) =	150/9850
			1.5228%

2)

A $10,000 three-month UST bill sold at 1.5%
Therefore, the value paid today is :
10000 x 98.5% (A)      =		$          9,850
Maturity value given as (B) =	$        10,000
Absolute yield in 3 months (B - A) =	$             150
So, 3 months Effective Yield (%) =	150/9850
			1.5228%
Annualized effective yield: (1.5228%) to power 4
			5.3780%

3) Bank Assets & Bonds are the largest portion of instrument in the Capital market.

4) According to Separation Theory in Finance, Investment decision in any business are dependent on the Opportunity available for business and scope therein. They are independent from Owners wishes either to take dividend or to pay loans. It also indicate that, Investment decisions for a business are not dependent on the source of funding it has.