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# Determining Annual Yield

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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.

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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)

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