The treasurer of a large corporation wants to invest $15 million in excess short
ID: 2753956 • Letter: T
Question
The treasurer of a large corporation wants to invest $15 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 6.55 percent; that is, the EAR for this investment is 6.55 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 108 days, what are the bond-equivalent and discount yields on this investment?
Explanation / Answer
The Final price of money market investment after 108 days=$15 million *(1.0655)(108/365)
=1.0189498338779632214127861770125* $15 million
=$15.2842475 million
money market yield on this instrument=((15.2842475 -15)/15) *(360/108)=0.0632=6.32%
bond-equivalent yield=(365/360)*6.32 %=6.40 percent
discount yield=((15.2842475 -15)/15.2842475) *(360/108)=0.062=6.20%
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