A T-bill has a face value of $10,000 and is selling for $9,800.If the T-bill matures in 90 days,what is its effective annual yield?
A) 8.16%.
B) 2.04%.
C) 8.54%.
D) 6.12%.
E) 8.42%

Question

Quizplus · Accepted Answer

First, we have to calculate the discount rate that $9,800 represents relative to the face value of $10,000:

Discount rate = (Face value - Price) / Face value = (10,000 - 9,800) / 10,000 = 0.02

Next, we have to convert this discount rate into an effective annual yield, using the formula for the yield on a discount basis:

Effective annual yield = (1 - Discount rate)^(365 / days to maturity) - 1

Plugging in the numbers, we get:

Effective annual yield = (1 - 0.02)^(365 / 90) - 1 = 0.0854 or 8.54%

Therefore, the answer is (C) 8.54%.

A T-Bill Has a Face Value of $10,000 and Is