Question

Calculate the effective annual interest rate for the following: a. A 3-month T-bill selling at $97,645 with par value $100,000

Answer 1

The effective annual rate is 10%

Step-by-step explanation:

Future value = Present value * (1+r)^n

(1+r)^n = Future value / Present value

r = (Future value / Present value)^n - 1

Here r is the rate

Substitute the values as below

r = (Future value / Present value)^n - 1

r= ($100,000 / $97,654)^4 - 1

r = 1.10000 - 1

r = 0.10000

r = 10%