Assume the time from acceptance to maturity on a $10,000,000 banker's acceptance is 90 days.Further assume that the importing bank's acceptance commission is 1 percent and that the market rate for 90-day B/As is 3.0 percent.The bond equivalent yield that the bank earns in holding the B/A to maturity is:

Question

Quizplus · Accepted Answer

The bond equivalent yield (BEY) can be calculated using the formula:

BEY = [(Face value - Purchase price) / Purchase price] x (365 / Days to maturity)

Here, the face value is $10,000,000, and the purchase price would be:

Purchase price = Face value x [1 + (Market rate x Days to maturity / 360)] - Commission

= $10,000,000 x [1 + (0.03 x 90 / 360)] - ($10,000,000 x 0.01)

= $10,000,000 x 1.0075 - $100,000

= $10,575,000

Plugging in these values into the BEY formula:

BEY = [($10,000,000 - $10,575,000) / $10,575,000] x (365 / 90)

= -0.0549 x 4.0556

= -0.2232

Since the answer must be positive, the correct choice is C:

BEY = 0.406 percent

Assume the Time from Acceptance to Maturity on a $10,000,000