ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Transcribed Image Text:Calculate the following five yields.
Calculate yields on 3-month T-bills for each of the prices in the following table and enter your results rounded to the nearest percent. Assume that all
the T-bills have a maturity value (MM) of $1,000. (Note: Be sure to use a negative sign if the yield is negative.)
Price (PBPB) of a
3-month T-Bill
with 90 days left
to maturity
$1,005
$1,000
$995
$990
$985
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Transcribed Image Text:Understanding the price of bonds and interest rates.
The remarkable thing about the events described in the article is that the yield on the 3-month T-bill was briefly negative. To see how this
could happen, consider the relationship between bond prices and bond yields.
A 3-month T-bill with a maturity value of $1,000 is just a piece of paper that entitles the holder to $1,000 in three months. For example, if you
were to buy a 3-month T-bill on September 24, 2008, with a maturity value of $1,000 and 90 days left to maturity, the U.S. government would
pay you $1,000 on December 23, 2008.
In general, the price of a bond is less than its maturity value. That is, if you are going to give up a certain amount of money for the duration of
the bond, you expect to be paid for this loss of liquidity and compensated for inflation that could reduce the value of the repayment at the
end of the period. Therefore, a piece of paper entitling you to $1,000 on December 23 would usually be worth less than $1,000 on September
24. The yield on a bond is a function of the percent by which your money implicitly grows while invested in it. In order to compare yields
among bonds, yield is always reported as an annual interest rate. A bond's yield is a function of its maturity value (MM), its price (PBPB), and
the number of days until it matures. The general formula for the yield on a zero-coupon bond such as a T-bill is as follows:
Percentage Yield = 100 x
5
1000
= 100 x 0.005 × 4 = 2%
M-PB
M
x 4
For example, if you were to pay $995 for a T-bill maturing in 90 days with a face value of $1,000, the percentage yield would be calculated as
follows:
M = face value of the bond = $1,000
PBM = pay for a T-bill = $995
days to maturity = 90
Percentage Yield = 100 x
= 100 x
X
1000-995
1000
360
days to maturity
360
90
=
Calculate the following five vields.
2%
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