You buy a 30-day 4% CD with a face value of GBP 20,000,000.00 at par when it is issued. You sell it in the secondary market after 10 days at 4.05%. What is your holding period yield?
A) 4.05%
B) 3.891%
C) 3.838%
D) 1.946%

Question

Quizplus · Accepted Answer

First, let's calculate the interest earned on the CD:

Interest = (20,000,000 x 0.04 x 30/360) = 66,667

After 10 days, the CD has a remaining term of 20 days. Let's calculate its value in the secondary market using the following formula:

CD value = Face value / (1 + (Market rate x time until maturity/360))

CD value = 20,000,000 / (1 + (0.0405 x 20/360)) = 20,011,000.00

The gain from selling the CD is:

Gain = CD value - Face value - Interest = 20,011,000.00 - 20,000,000 - 66,667 = 11,333.00

The holding period yield can be calculated as follows:

Holding period yield = (Gain / Face value) x (360 / days held)

Holding period yield = (11,333.00 / 20,000,000) x (360/10) = 0.01891

Therefore, the holding period yield is 1.891%, which is option B.

You Buy a 30-Day 4% CD with a Face Value