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

To calculate the bond equivalent yield (BEY), we first need to calculate the discount faced by the importing bank when they purchase the B/A. 
Discount = (10,000,000 * 0.03 * 90)/360 = $75,000

Importing bank's acceptance commission = 1% of $10,000,000 = $100,000

Total cost for the bank = $10,000,000 + $75,000 + $100,000 = $10,175,000

To calculate BEY, we use the following formula:

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

BEY = [(10,000,000 - 10,175,000)/10,175,000] * (365/90) = 0.170 or 17.0%

However, the question asks for the bond equivalent yield, which means we need to double the semi-annual yield.

BEY = 2 * 0.170 = 0.340 or 34.0%

But, the answer options given do not match our calculation. Upon reviewing the answer options, the closest answer is C) 4.06%, which is actually the annualized yield. To convert that to BEY, we can use the following formula:

BEY = (1 + Annualized Yield/2)^2 - 1

BEY = (1 + 0.0406/2)^2 - 1 = 0.017 or 1.7%

Then, we double this to get the bond equivalent yield:

BEY = 2 * 0.017 = 0.034 or 3.4%

Therefore, the best choice is C) 4.06%.

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