Final answer:
The price of a six-month Treasury bill with a 5% annual interest rate is calculated by discounting the par value, which results in a price lower than the face value.
Assuming a $1000 par value, the price is calculated using a specific formula that accounts for the interest rate and the time period of the investment.
Step-by-step explanation:
The price of a six-month Treasury bill (T-bill) with an annual interest rate of 5% can be found by calculating the discount the bill is sold for relative to its par value (face value, typically $1000).
The Treasury bill is a short-term investment, and the price is determined by discounting the par value by the half-year interest rate. The formula to calculate the price of the T-bill is: Price = Par Value / (1 + (Interest Rate × Time)) where the Time is expressed in years.
For a six-month T-bill, Time would be 0.5 years. If we assume a par value of $1000, the calculation would be:
Price = $1000 / (1 + (0.05 × 0.5))
The actual calculation would yield a price lower than the par value by the interest for the six-month period. This represents the yield to the investor, who would receive the par value upon maturity of the T-bill.