[FIXED INCOME]

[NGOCVU94]

Hi,
I am a CFA candidate and I am going to sit for the exam this December. I am currently working on Reading 53. Introduction to Fixed Income Valuation and I got stuck on an example in Schewer Note. Please help me!
Example P56 - Book 5 - Schewer Note:
“A $1000 90-day T-bill is priced with an annualized discount of 1.2%. Calculate its market price and its annualized add-on yield on a 365-day year”
Answer:
The discount from face value if 1.2% x 90 / 360 x 1,000 = $3 so the current price is 1000 - 3 = 997”
I dont understand the 1.2% x 90 / 360 x 1,000 = $3
Please help me out!
Thanks a lottt

 

[NGOCVU94]

Thank you for your reply
I thought T-bills are quoted as annualized discount from face value based on 360-day year?

 

[itera]

i think 360 is right

 

[S2000magician]

There are two conventions working in this question.
The T-bill quote is based on a 360-day year; you use that to compute the dollar value of the discount.
Then you convert that to an add-on rate based on a 365-day year.
I wrote an article on comparing yield measures that may be of some help here: http://financialexamhelp123.com/comparing-yield-measures-quant/

 

[NGOCVU94]

Thank you guys so much! I got the point

 

[S2000magician]

My pleasure.

 

[Salman]

The cirriculum provides a formula for this.
Discount Value = Discoount Yeild * Face Value * (t/360)