Question

A T-bill quote sheet has 120-day T-bill quotes with a 4.80 bid and a 4.74 ask. If the bill has a $10,000 face value, what is the investor's actual annual rate of return on this investment (bond equivalent yield)?

Answer 1

The investor's actual annual rate of return on this investment, also known as the bond equivalent yield, is approximately 3.8675%.

Step-by-step explanation:

The investor's actual annual rate of return on this investment, also known as the bond equivalent yield, can be calculated using the bid and ask prices from the T-bill quote sheet.

First, we calculate the difference between the ask and bid prices: 4.80 - 4.74 = 0.06.

Next, we divide the difference by the bid price: 0.06 / 4.74 = 0.01266, or 1.266%.

Finally, we multiply the result by 365/120 to annualize the return: 1.266% * (365/120) = 3.8675%.

Therefore, the investor's actual annual rate of return on this investment is approximately 3.8675%.