Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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If you purchase $27,000 in U.S. Treasury Bills with a discount rate of 4.2% for a period of 26 weeks, what is the effective interest rate? Round to the nearest hundredth percent.
Step 1
The effective interest rate on a U.S. Treasury Bill, or T-Bill, is the actual interest rate on a loan to the government and takes into account the fact that the purchaser does not pay the full amount of the T-Bill. It is calculated using the interest, purchase price, and time.
The amount of interest on a T-Bill is calculated as follows where the discount rate is given as a decimal and the time will be a fraction whose numerator is the given amount of time in weeks and denominator is 52 weeks.
interest = face value ✕ discount rate ✕ time
The rate was given to be 4.2%. As a decimal, we have
4.2% = .
Calculate the interest (in $) for a $27,000 T-Bill with a discount of 4.2% for 26 weeks.
| interest | = | face value ✕ discount rate ✕
|
||
| = | $27,000 ✕ ✕
|
|||
| = | $ |
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