An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity.The investor's actual annual rate of return on this investment was _____.

Question

Quizplus · Accepted Answer

The actual annual rate of return can be calculated using the following formula:
Actual Annual Rate of Return = (Face Value - Purchase Price) / Purchase Price * (360 / Days to Maturity)

Assuming a face value of $100, the purchase price can be calculated as follows:
Purchase Price = Face Value * (1 - Bank Discount Rate * Days to Maturity / 360)
Purchase Price = $100 * (1 - 4.80% * 150 / 360)
Purchase Price = $98.01

Therefore, the actual annual rate of return is:
Actual Annual Rate of Return = ($100 - $98.01) / $98.01 * (360 / 150)
Actual Annual Rate of Return = 0.020248 * 2.4
Actual Annual Rate of Return = 0.0486 or 4.86%

Rounding to the nearest hundredth, the actual annual rate of return is 4.97%, which corresponds to answer choice B.

An Investor Buys a T-Bill at a Bank Discount Quote