CFA Level I, Cor­po­ra­te Finan­ce, Bond Equi­va­lent Yield and Dis­count-Basis Yield

Con­si­der an 85-day $ 1,000,000 U.S. T‑bill sold at a dis­count rate of 8.5 per­cent. Calculate

a) the bond equi­va­lent yield and

b) the dis­count-basis yield.

Solu­ti­on:

a) The bond equi­va­lent yield, howe­ver, com­pu­tes to

bond equi­va­lent yield = (face value – purcha­se price)/purchase price·(365/number of days to maturity)

= (1,000,000 – 79,930,56)/979,930.56·(365/85)

= 20,069,44/979,930.56·4.2941

= 0.0879

= 8.79 percent.

b) The dis­count-basis yield can be com­pu­ted as

dis­count-basis yield = (face value – purcha­se price)/face value·(360/number of days to maturity)

= (1,000,000 – 79,930,56)/1,000,000·(360/85)

= 20,069.44/1,000,000·4.2353

= 0.085

= 8.5 percent.

 

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