A 90-day T-bill is selling for $9,900. The par is $10,000. The effective annual return on the T-bill is (watch your rounding)

Question

Quizplus · Accepted Answer

First, calculate the discount rate:
Discount = Par Value - Purchase Price
Discount = $10,000 - $9,900 = $100

Next, calculate the annual discount rate:
Annual Discount Rate = Discount / Purchase Price
Annual Discount Rate = $100 / $9,900 = 0.0101

Finally, calculate the effective annual return:
Effective Annual Return = (1 + Annual Discount Rate)^365/90 - 1
Effective Annual Return = (1 + 0.0101)^4.055 - 1
Effective Annual Return = 0.0416 or 4.16%

A 90-Day T-Bill Is Selling for $9,900