The treasurer of a large corporation wants to invest $21 million in excess short
ID: 2739731 • Letter: T
Question
The treasurer of a large corporation wants to invest $21 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.24 percent; that is, the EAR for this investment is 3.24 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 106 days, what are the bond equivalent and discount yields on this investment?
Explanation / Answer
Bond yield is calculated for annual basis to compare this yield with any other returns to know the efficiency of its returns.
Let us calculate the Bond equivalent yield as follows.
Bond equivalent yield = [(par value –Price of the stock) / Price of the stock × (365/ Number of days)
(or)
= EAR * 365 / Number of days to maturity
= (3.24%*365) / 106
= 0.94%
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