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An investor is considering two investments. One investment is a 91-day bond issued by a bank which pays a rate of interest of 4% per annum...

this question is desined for financial mathematics course
details:



(i) Calculate the price of the treasury bill and the annual simple rate of discount
from the treasury bill if both investments are to provide the same effective rate
of return. [3]

(ii) Suggest one factor, other than the rate of return, which might determine which
investment is chosen.

Answers

emmanuel
(i) Let d be the annual simple rate of discount.
Assume the bank bond also pays out €100.
The present value of the amount invested in the bank bond would be X such
that:
( )
91
365
X 100 1.04 99.0269
-
= = (99.0276 if 365.25 days in a year used) [1]
To provide the same effective rate of return a treasury bill that pays 100 must
have a price of 99.0269 and so 91 100 1 99.0269
365
? ? d ? ? - = ? ? [1]
( ) 365 1 0.990269 0.03903
91
d =- = (unchanged if 365.25 days in a year used)[1]
emanuelleipa answered the question on October 15, 2019 at 13:32

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