A bank accepts 90 day bills with a face value of $20 million for a fee of 120 bps.This bill is sold to an investor at a yield of 4% p.a.The amount received by the borrower is $19 804 666.30.

Question

Quizplus · Accepted Answer

The fee charged by the bank is (20,000,000 x 120 bps)/100 = $240,000.

The amount received by the borrower (after deducting the fee) is $19,760,000.

To calculate the price at a yield of 4%, we can use the following formula:

Price = Face Value / (1 + Yield x (Days to Maturity/365))

Days to maturity for a 90 day bill is 90.

So, Price = 20,000,000 / (1 + 0.04 x (90/365)) = $19,658,359.91

Thus, the amount received by the borrower is less than the price at a yield of 4%. Therefore, the statement is false.

A Bank Accepts 90 Day Bills with a Face Value