A Treasury bill has 36 days left to maturity. The bank discount yield on the bill is 4.14 percent. What is the effective annual rate?

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Quizplus · Accepted Answer

The effective annual rate is 4.30 percent. This is because the bank discount yield is a simple interest rate, while the effective annual rate is a compound interest rate. The formula for converting a simple interest rate to an effective annual rate is:EAR = (1 + r/n)^n - 1where:EAR is the effective annual rater is the simple interest raten is the number of compounding periods per yearIn this case, the simple interest rate is 4.14 percent and the number of compounding periods per year is 365 (since there are 365 days in a year). Plugging these values into the formula, we get:EAR = (1 + 0.0414/365)^365 - 1 = 0.0430Therefore, the effective annual rate is 4.30 percent.

A Treasury Bill Has 36 Days Left to Maturity