Question

Corporate Finance, BOOK: Principles of Corporate Finance, Richard Brealey 12

A six-month Treasury bill and a nine-month bill both sell at a discount of 12%.

a-1. Calculate the annual yield of the six-month Treasury bill. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Annual yield = %

a-2. Calculate the annual yield of the nine-month Treasury bill. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Annual yield = %

Answer 1

Annual Yield = 6 Months Treasury Bill
Assume Face value of Treasury Bill $ 100
Sell T Bill at Discount @12%
Discounted Bill $ =100-12= $ 88
so Interest rate 12% on principal amount $88 period 6 Months
Interest rate 6 Month	12/88*100	13.64%
Annual Interest	(1+ Six month Interest rate) ^(12/6)-1
	(1+13.64%)^2-1
	(1+0.1364)^2-1
Annual Interest (Yield )	29.14%

Annual Yield = 9 Months Treasury Bill
Assume Face value of Treasury Bill $ 100
Sell T Bill at Discount @12%
Discounted Bill $ =100-12= $ 88
so Interest rate 12% on principal amount $88 period 9 Months
Interest rate 9 Month	12/88*100	13.64%
Annual Interest	(1+ 9 month Interest rate) ^(12/9)-1
	(1+13.64%)^(4/3)-1
	(1+0.1364)^(4/3)-1
Annual Interest (Yeild)	18.59%