Suppose that you are considering buying a U.S. Treasury bill with a face value o

Question

Suppose that you are considering buying a U.S. Treasury bill with a face value of $1,000 and maturity of one year. This Treasury bill is a promise from the U.S. government to pay you $1,000 in one year’s time. Suppose that investors are willing to pay $944 today for this Treasury bill. What is the discount rate that these investors appear to be applying? Equivalently, at this price, what is the rate of return on this investment? Assume annual compounding.

Do not round at intermediate steps in your calculation. Report the rate in percent to three decimal places. Do not type the % symbol.

Explanation / Answer

Yield to Maturity = (Face Value / Current Price of Bond) ^ (1 / Years to Maturity) - 1

Discount rate = (1,000 / 944)^( 1 /1) - 1

Discount rate = 1.059322 - 1

Discount rate = 0.059322 or 5.932%

Rate of return = ( 1000 - 944) / 944

Rate of return = 5.932%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.