Question

A Treasury bill with a par value of $100,000 due three months from now is selling today for $97,087 with an effective annual yield of A) 12.40%. B) 12.55%. C) 12.62%. D) 12.68%. E) None of the options are correct.

Answer 1

The effective annual yield of a treasury bill is equivalent to 12.55%.

Option B is the correct answer.

What is the treasury bill?

The treasury bill is the trading instrument that is issued in the money market by the government.

Given values:

Par value: $100,000

Future value: $97,087

Number of years from now: 3 years

Step-1 Computation of interest rate of treasury bill:

$\rm\ Interest \rm\ rate \rm\ on\rm\ treasury \rm\ bill=\frac{\rm\ Par \rm\ value - \rm\ Future \rm\ value}{\rm\ Future \rm\ value} \\\rm\ Interest \rm\ rate \rm\ on\rm\ treasury \rm\ bill=\frac{\ 100,000-\ 97,087}{\ 97,087} \\\rm\ Interest \rm\ rate \rm\ on\rm\ treasury \rm\ bill=0.03$

Step-2 Computation of equivalent yield the bill:

$\rm\ Equivalent \rm\ annual \rm\ yield =(\rm\ 1+ \rm\ interest \rm\ rate)^{\rm\ Number \rm\ of \rm\ years} - 1\\\rm\ Equivalent \rm\ annual \rm\ yield=(1+0.03)^{4} -1\\\rm\ Equivalent \rm\ annual \rm\ yield=1.01255-1\\\rm\ Equivalent \rm\ annual \rm\ yield=0.01255$

Therefore, 12.55% is the equivalent yield on the treasury bill.

Learn more about the equivalent yield in the related link:

https://brainly.com/question/21275322

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