Question

A stock had a return of 9 percent last year. If the inflation rate was 2.4 percent, what was the approximate real return? Answer in percent to one decimal place. As a percent of par, what is the price of a U.S. Treasury bill with 75 days to maturity quoted at a discount yield of 0.95 percent? Answer to four decimal places.

Answer 1

The real return on the stock is 6.6% after adjusting for inflation. The price of a U.S. Treasury bill with 75 days to maturity and quoted at a discount yield of 0.95% is approximately $99.8021, or 99.8021% of par.

Step-by-step explanation:

The student has asked for the real return on a stock and the price of a U.S. Treasury bill given certain conditions. The real return adjusts the nominal return for inflation, to show the true earning power of an investment. To calculate the real return, use the following formula: Real Return = Nominal Return - Inflation Rate. Hence, the real return in this case would be 9% - 2.4% = 6.6%.

The price of a Treasury bill can be found using the formula: Price = Face Value x (1 - (Discount Yield x (Days to Maturity / 360))). For a Treasury bill with a quoted discount yield of 0.95% and 75 days to maturity, the calculation is as follows:

Assuming a face value of $100 (since the exact face value is not provided), Price = $100 x (1 - (0.0095 x (75 / 360))) = $100 x (1 - (0.0095 x 0.2083)) = $100 x (1 - 0.0019795) = $100 x 0.9980205 = $99.8021. So the price of the Treasury bill would be $99.8021, or as a percent of par, it would be 99.8021%.