Question

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

1) about 13.4 percent
2) about 12.5 percent
3) about 11.3 percent
4) about 11.6 percent
5) about 10.7 percen

Answer 1

The annualized yield of a T-bill purchased for $48,500 with a $50,000 par value and a 90-day maturity is about 12.5 percent. This is found by calculating the profit, then annualizing the yield based on the investment amount and the time to maturity.

Step-by-step explanation:

To calculate the annualized yield on a T-bill (Treasury bill), you need to consider the price you paid for the bill, its face value, and its time to maturity. The investor buys a T-bill with a $50,000 par value for $48,500 and holds it to a maturity of 90 days. The profit is the difference between the par value and the price, which is $50,000 - $48,500 = $1,500.

Next, we need to annualize this yield because the T-bill matures in 90 days, not a full year. To annualize the yield, we use the formula:

Annualized Yield = (Profit / Investment Amount) x (365 / Days to Maturity)

In this case:

Annualized Yield = ($1,500 / $48,500) x (365 / 90) = 0.030927835 x 4.05555556 = 0.1254 or 12.54%

The closest answer to 12.54% is about 12.5 per cent, which is the annualized yield for this T-bill.