Consider an 85-day $ 1,000,000 U.S. T‑bill sold at a discount rate of 8.5 percent. Calculate
a) the purchase price,
b) the money market yield and
Solution.
a) We get
purchase price = 1,000,000 – [0,085·(85/360)·(1,000,000)]
= 1,000,000 – 20,069,44
= $ 979,930,56.
b) Then, the market yield computes to
money market yield = (face value – purchase price)/purchase price·(360/number of days to maturity)
= (1,000,000 – 79,930,56)/979,930.56·(360/85)
= 20,069,44/979,930.56·4.2353
= 0.,0867
= 8.67 percent.
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