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

Answer 1

12.55%

Step-by-step explanation:

Note that the T-bill rate of return is annualized based on 360-day count convention, hence, to begin with, let us determine the rate of return over a 90-day maturity period as shown thus:

rate of return over 90 days=(FV-PV)/FV

FV=face value=$50,000

PV=purchase price=$48,500

rate of return over 90 days=($50,000-$48,500)/$50,000

rate of return over 90 days=3.00%

annualized rate of return=(1+90day return)^(360/90)-1

the annualized rate of return=(1+3.00%)^(360/90)-1

the annualized rate of return=12.55%