The treasurer of a large corporation wants to invest $20 million in excess short
ID: 2650489 • Letter: T
Question
The treasurer of a large corporation wants to invest $20 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.15 percent; that is, the EAR for this investment is 3.15 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 90 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 3 decimal places. Omit the "%" sign in your response.)
Bond equivalent yield %
Discount yield %
Explanation / Answer
Answer:
Effective Annual Rate = (1 + i/ n) n-1
Here; i stands for the annual interest rate
N stands for the number of compounding periods = 360 /90 =4
0.0315 = {(1 + (i/ 4)} ^(4) -1
(1 + (i/ 4) = (1.0315)^(1/4)
(1 + (i/ 4) = 1.00778365
Hence i = 0.031135 = 3.114%
Bond equivalent yield = 3.114%
Bond equivalent yield = [(par value - purchase price)/ purchase price] * [360/days to maturity]
0.03114=[(100 -Price) /Price]*(360 /90)
0.03114=[(100 -Price) /Price]*4
[(100 -Price) /Price] = 0.007785
Hence Price =$99.228
Bank Discount Yield = [(par value - purchase price)/par value] * [360/days to maturity]
=[(100
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