On Friday 9 March Cross Investments buys a bank bill with a par value of $1 mill
ID: 2817051 • Letter: O
Question
On Friday 9 March Cross Investments buys a bank bill with a par value of $1 million, maturing on Thursday 7 June. On Tuesday 8 May Cross Investments sells the bill to Zulu Capital. The following table shows bank bill yields pa for various terms on various dates.
Assume that these bill transactions occur in Australia and are settled on the trade date. What effective annual rate of return has Cross Investments earned?
Date Yield pa 30 days 60 days 90 days 9 March 4.60% 4.7% 4.75% 8 May 4.4% 4.55% 4.65% 7 June 4.3% 4.35% 4.35%Explanation / Answer
(1+ Rate60 days * (60/360) ) = (1 + Rate90 (9 March - 7 June) * (90/360)) / (1 + Rate30 (8 May- 7 June * ( 30/360))
= ( 1 + .0475 * (.25))/ (1 + .044* (.0875))
=(1.011875)/ ( 1.00367)
= 1.008178-1 = .008178 * 6
Rate of return PA = 4.9 %
Bill expires on 7th June, and bill is par. Hence coupon rate is 4.75% based on 90 day period interest rate on bill on March 9.
Rate of return would have been 4.75% had the bill been sold at maturity.
Rate of return 30 days prior to maturity on 8 May= 4.4 %
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