bond yield

[wxyz]

The bank on a discount yield for a $1,000 face value U.S. Treasury bill (T-bill) trading at a price of $983.10 with 160 days to maturity is approximately:
A. 1,69%
B. 1.72%
C. 3.80%
D.3.90%

?

 

[financegal]

bank discount yield=(dollar discount/Face value)*360/t; annualised

dollar disount=face value - market price=1000-983.1=16.9
t=160

bank discount yield=(16.9/1000)*(360/160)=3.803%. answer is B.



Edited 1 time(s). Last edit at Tuesday, April 11, 2006 at 10:15PM by financegal.

 

[wxyz]

Your calculation is right, correct answer is C, 3.80%, from the book. thanks.

But I thought it could us calculator BA II:
N = 160/360,
PV = -983.10
FV = 1,000
PMT = 0
--------------
I/Y = 3.90%, my answer: D
why am I wrong?

 

[jamespucyk]

SS2

Banker's Discount:
Discount/Face Value * 360/Time

This isn't a time value calculation.

 

[jamespucyk]

Basically, the equivilant of what you are doing is:

1000/983.1 *360/160, which will give you a slightly higher term than D/F would, giving you a higher figure.

 

[wxyz]

thx. but why this isn't a time value calculation?

 

[jamespucyk]

Because it's a money market calculation, not a bond calculation, they are asking for the banker's discount on top of that explicitly:

"The bank on a discount yield ..."

 

[c_hayhurst]

Wow. I actually got one of these right.

You don't use TVM in finding Yield to Maturity for bonds. Series 7 training strikes again!

 

[financegal]

bank discount yield uses simple interest and not compound interest. so TVM cannot be used. TVM uses compound interest=I/Y, number of compounding periods=N