Roxy plans to buy four-month Treasury Bills in eight months.Currently the price on twelve-month Treasury Bills is $962,456 per million.The risk-free rate is 5.2%.What is the fair forward price per $1 million?

Question

Quizplus · Accepted Answer

The fair forward price can be calculated using the formula for the future value of the current price of the Treasury Bills, which is $962,456. The formula to calculate the future value is: Future Value = Present Value * (1 + risk-free rate)^time. Since Roxy plans to buy in eight months and the risk-free rate is 5.2% annually, we convert the rate and time to match: 5.2% annual rate = 0.052/12 per month, and 8 months is the time period. So, the calculation is $962,456 * (1 + 0.052)^(8/12). However, the correct calculation should consider the annual rate without monthly division for this context, leading to $962,456 * (1 + 0.052)^(8/12) = $995,538, which matches choice B.

Roxy Plans to Buy Four-Month Treasury Bills in Eight Months