Treasury bills are short-term government bonds, which pay the lender a fixed amo

Question

Treasury bills are short-term government bonds, which pay the lender a fixed amount of cash on the maturity date. Suppose Jen Franklin obtains a T-Bill that will pay her $1,000,000 in exactly 38 days from now. She purchased the T-Bill today for $995,555.55 a) Calculate the simple annual interest rate that Jen will earn if she holds the T-Bill until it matures. b) Calculate the bond equivalent yield that Jen will earn if she holds the T-Bill until it matures. Hint: bond equivalent yield is the same as annual rate, compounded semi- annually

Explanation / Answer

A:Annual Interest rate = (FV-PV)/ PV * 365/Number of days till maturity * 100

= (1000000-995555.55)/ 995555.55   * 365/38 * 100

=4.29%

B: Bond equivalent yield compounded semiannually = (1+ 4.29%/2)^2 -1

= 4.336%

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