Question

A T-bill quote sheet has 90-day T-bill quotes with a 5.02 bid and a 4.96 ask. If the bill has a $10,000 face value, an investor could sell this bill for _____?

Answer 1

When interest rates rise, previously issued bonds with lower interest rates usually decrease in price. In this case, you would expect to pay less than $10,000 for the bond.

Step-by-step explanation:

When interest rates rise, the prices of previously issued bonds with lower interest rates usually decrease. Conversely, when interest rates fall, the prices of previously issued bonds with higher interest rates typically increase.

In this case, since the interest rates have increased, you would expect to pay less than $10,000 for the bond.

To calculate the price you would actually be willing to pay, you would need to consider the difference in interest rates and the time remaining until the bond matures. The formula to calculate the price of a bond is:

Price = Face Value / (1 + interest rate * time remaining)

In this case, with an interest rate of 6% for the bond and 9% for the current market rate, and one year remaining until the bond matures, you can plug in these values:

Price = $10,000 / (1 + 0.09 * 1) = $9,174.41

Therefore, you would be willing to pay approximately $9,174.41 for the bond.