Question

A t-bill quote sheet has 180-day t-bill quotes with a 3.30 bid and a 3.26 ask. if the bill has a $10,000 face value, an investor could buy this bill for _____.

Answer 1

Answer: An investor could buy this bill for $9837 .

We follow these steps to arrive at the answer:

First we calculate the interest on the bill for 180 days, assuming that the value of the T-bill is $1.

We consider the ask rate since this is the rate an investor will get from buying this bill.

`Interest on the bill = Int rate * (No. of days to maturity)/(360)`

[tex]Interest on the bill = 0.0326 * \frac{180}{360}[/tex]

`Interest on the bill = 0.0163`

A t-bill doesn't pay interest; instead the interest amount is deducted from the Face Value in order to arrive at the purchase price.

If the face value of the t-bill is $1, the purchase price is
`1 - 0.0163 = 0.9837`

Since the actual face value of the t-bill is $10,000, the purchase price is

`10,000 * 0.9837 = 9,837`