1.

What would be the annualized discount rate % and the annualized investment rate % if a Treasury
bill was purchased for $9,360 maturing in 270 days for $10,000?

Ans: Discount rate = (F − P)/F × 360/n

= (10,000 − 9,360)/10,000 × 360/270
Discount rate = 0.0853 ≈ 8.53%
Investment Rate = (F − P)/F × 365/n
= (10,000 − 9,360)/9,360 × 365/270
Investment Rate = 0.0924 ≈ 9.24%

2. Suppose you want to earn an annualized discount rate of 2.5%. What would be the most you would
pay for a 182-day Treasury bill that pays $10,000 at maturity?

Ans: Discount rate = (F − P)/F × 360/n

0.025 = (10,000 − x)/10,000 × 360/182
0.025 = (3,600,000 − 360x)/1,820,000
45,500 = 3,600,000 − 360x
360x = 3,600,000 − 45,500
X = 3,554,500/360 = $9,873.61

3. What is the minimum discount rate you will accept if you want to earn at least a 0.25% annualized
investment rate on a 182 day $1,000 T-bill?

Ans: Let P be the price of the T-bill:

0.0025 < [($1,000 ‒ P) / P] × 365/182

0.0025 < [($1,000 ‒ P) / P] × 2.00549

0.0025P < 2,005.49 – 2.00549P
0.0025P + 2.00549P < 2,005.49
2.00799P < 2,005.49 = P < 2,005.49/2.00799
P < 998.754975
Now, (($1,000 – 998.754975) / $1,000) × 360/182 = 0.00246269
 Thereby, you should bid a minimum discount rate of 0.246269% (the minimum discount
rate that guarantees a price of 998.754975). This discount rate satisfies the following
equation:

3. The price of a 145-day commercial paper is $4,525. If the annualized discount rate is 5.25%, what
will the commercial paper pay at the day of maturity??

Ans: Let X be what the paper will pay at the day of maturity
(X – 4,525)/4,525 × 365/145 = 0.0525

(X – 4,525)/4,525 × 2.5172 = 0.0525

(X – 4,525)/4,525 = 0.02086

X – 4,525 = 94.38

X = 4,619.38

4. Your minimum discount rate bid of 0.35% for a $10,000 T-bill that matures in 91 days has been
accepted. Calculate your annualized investment rate.

Ans: Since your bid was accepted, you will pay for this T-bill $9,991.16. We can calculate this
price using the formula for the discount rate:

0.0035 = [($10,000 – P) / P] × 360/91

0.0035 = [($10,000 – P) / P] × 3.956
0.0035P = 39,560 – 3.956P
3.9595P = 39560 → P = 39,560/3.9595
P = $9,991.16
Now, [($10,000 - $9,991.160) / $9,991.16] × 365/91 = 0.003548611
Therefore, your annualized investment rate will be 0.3548611%
 5. The price of $8,000 face value commercial paper is $7,930. If the annualized discount rate is 4%,
when will the paper mature? If the annualized investment rate % is 4%, when will the paper mature?

Ans: Let N  when the paper matures

Discount Rate:
[($8,000  $7,930) / $8,000)]  (360 / N )  0.04
($70 / $8,000)  (360 / N )  0.04
($0.00875)  (360 / N )  0.04
(360 / N )  0.04  (1/ $0.00875)
(360 / N )  4.571429
N  78.75  79days
Investment Rate:
[($8,000  $7,930) /($7,930)]  (365 / N )  0.04
($70 / $7,930)  (365 / N )  0.04
(365 / N )  0.04  (1/ 0.008827)
365 / N  4.53155
N  80.55  81days

6. Calculate the price of a 180-day T-bill purchased at a 5% discount rate if the T-bill has a face value
of $5,000.

Ans: Discount rate = (F − P)/F × 360/n

0.05 = (5,000 − x)/5,000× 360/180

0.05 = (1,800,000 − 360x)/900,000

45,000 = 1,800,000 − 360x360x = 1,800,000 − 45,000

X = 1,755,000/360 = $4,875

7. What is the current yield to maturity on the zero coupon bond that has a face amount (or par value)
of $1,000 and the current market price for the bond is $ $850? The bond matures in 4 years.

(1/years to maturity )
 Face Value 
Yield to Maturity:   –1;
 Current price 
(1/4 )
 1000 
   1  0.0414664 or 4.1466%
Ans:  850 

= 1.176470.25 – 1 → 1.041466 – 1 = 0.041466 or 4.1466%

8. Suppose there are two bonds you are considering:
Bond A Bond B

Maturity (years) 20 30
Coupon rate (%) 12 8
 (paid semiannually)
Par Value $1,000 $1,000
a. If both bonds had a required rate of return of 10%, what would the bonds’ prices be?
b. Explain what it means when a bond is selling at a discount, a premium, or at its face amount (par
value). Based on results in part (a), would you consider both bonds to be selling at a discount,
premium, or at par?
c. Re-calculate the prices of the bonds if the required return falls to 9%.

Solution:

a. Bond A
1 1  Principal payment
P  Coupon payment    n 

 r r (1  r )  (1  r ) n
 1 1  1,000
P  60    40 

 0.05 0.05(1  0.05)  (1  0.05) 40
P  60   20  2.840913646   142.0456823
P  1029.545181  142.0456823  $1,171.59

Bond B
1 1  Principal payment
P  Coupon payment    n 

 r r (1  r )  (1  r ) n
 1 1  1,000
P  40    60 

 0.05 0.05(1  0.05)  (1  0.05)
60

P  40   20  1.070710475  53.53552375
P  757.171581  53.53552375  $810.71

b. Bond A is selling at a premium and Bond B is selling at a discount.

c. Bond A
 1 1  Principal payment
P  Coupon payment    n 

 r r (1  r )  (1  r ) n
 1 1  1,000
P  60    40 

 0.45 0.45(1  0.45)  (1  0.45)
40

P  60   20.22222222  3.820637802   171.9287011

P  984.0950651  171.9287011  $1,156.02

Bond B
1 1  Principal payment
P  Coupon payment    n 

 r r (1  r )  (1  r ) n
 1 1  1,000
P  40    60 

 0.45 0.45(1  0.45)  (1  0.45)
60

P  40   20.22222222  1.584200184  171.9287011

P  745.5208814  71.28900828  $816.81

9. A $1,000 par bond with an annual coupon has only one year until maturity. Its current yield is
7.621% and its yield to maturity is 12%. What is the price of the bond?
Coupon
Current yield =
Ans: Price
Coupon
0.07621 =
Price
Coupon = 0.07621  Price
Coupon + 1,000
Price 
1.12
0.07621  Price + 1,000
Price 
1.12
1.12Price  0.07621Price  1,000
1.12Price  0.07621Price  1,000
1.04379Price  1,000
1,000
Price   $958.05
1.04379
Price = $958.05
10. Calculate the annualized discount rate and annualized investment rate on the purchase of 91-day T-
bill, if the face value is $3,000 and purchase price is $2,900.

Ans:

Annualized discount rate = [(3,000 - 2,900)/3,000]  (360/91)

= (100/3000) × 3.956

= 0.0333 × 3.956

= 0.1318% or 13.18%

Annualized investment rate = [(3,000 - 2,900)/2,900]  (365/91)

= (100/2,900)  4.01

= 0.0344  4.01

= 0.1379% or 13.79%