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    Determining Annual Yield

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    Please help with the following problem.

    The treasurer of DeShack Company has approximately $1,000,000 to invest for the next 60 days. She is considering the purchase of a T-bill with the following characteristics: face value of $1,000,000, a remaining maturity of 60 days and a quoted rate of 4.0%. She wants to determine the effective annual yield that she will receive from purchasing the T-bill and holding it to maturity.

    © BrainMass Inc. brainmass.com December 24, 2021, 10:21 pm ad1c9bdddf
    https://brainmass.com/business/finance/determining-annual-yield-466461

    SOLUTION This solution is FREE courtesy of BrainMass!

    Problem: The treasurer of DeShack Company has approximately $1,000,000 to invest for the next 60 days. She is considering the purchase of a T-bill with the following characteristics: face value of $1,000,000, a remaining maturity of 60 days and a quoted rate of 4.0%. She wants to determine the effective annual yield that she will receive from purchasing the T-bill and holding it to maturity.

    Solution:

    The formula for effective yield is:

    [1 + (i/n)]^n - 1

    Where:

    i = the nominal rate
    n = the number of payment periods in one year

    So for this case (which has limited information) I would assume that the quoted rate is monthly and the investment of 60 days would be equivalent to 2 months.

    The calculation would be:

    [1 + (.04/2)]^2 - 1 = 0.0404 (or 4.04% effective interest rate)

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 10:21 pm ad1c9bdddf>
    https://brainmass.com/business/finance/determining-annual-yield-466461

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