If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

Question

Quizplus · Accepted Answer

The formula for annualized yield on a T-bill is:
(Par Value – Purchase Price) / Purchase Price X (360 / Days to Maturity)
Plug in the values:
(50,000 – 48,500) / 48,500 X (360 / 90) = 0.025 X 4 = 0.1 or 10%
Therefore, the annualized yield is 10%.Since there are 4 90-day cycles in a year, multiplying by 4 will result in 40% which gives us 10% for a 90-day period. Hence the answer is option B.

If an Investor Buys a T-Bill with a 90-Day Maturity