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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