The treasurer of a large corporation wants to invest $44 million in excess short
ID: 2649983 • Letter: T
Question
The treasurer of a large corporation wants to invest $44 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.56 percent; that is, the EAR for this investment is 3.56 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 121 days, what are the bond equivalent and discount yields on this investment? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Bond equivalent yield %
Discount yield %
Explanation / Answer
Current Price = $ 44 million
Par Value or Face Value = 44*(1+3.56%)^(121/365)
Par Value or Face Value = $ 44,51321 Million
Bond equivalent yield = (Face Value - Current Price)/Current Price * 365/ No of Days to maturity
Bond equivalent yield = (44.51321 - 44)/44 * 365/121
Bond equivalent yield = 3.52%
Discount yield = (Face Value - Current Price)/Current Price * 360/ No of Days to maturity
Discount yield = (44.51321 - 44)/44 * 360/121
Discount yield = 3.47%
Answer
Bond equivalent yield = 3.52%
Discount yield = 3.47%
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