An investor buys a T-bill at a bank discount quote of 4.79 with 95 days to maturity. What is the bond equivalent yield of the T-bill? What is the effective annual yield of the T-bill? Please keep at least four decimal places in intermediary steps.

An investor buys a T-bill at a bank discount quote of 4.79 with 95 days to maturity. What is the bond equivalent yield of the T-bill? What is the effective annual yield of the T-bill? Please keep at least four decimal places in intermediary steps.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call. A bond's current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield to call, it does not represent the actual return that investors should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading, the yield to maturity and yield to call are more relevant. The yield to maturity (YTM) is the rate of return earned on a…
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Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods):

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