Bond Equivalent Yield Financial Markets PDF

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BOND EQUIVALENT YIELD, DISCOUNT YIELD AND EFFECTIVE ANNUAL RETURN

Assignment 1. What is the discount yield, bond equivalent yield, and effective annual return on a 1 million Treasury bill that currently sells at 99.375 percent of its face value and is 65 days from maturity? Pf = Php1,000,000 P0 = Php1,000,000 (0.99375) = Php993,750 n = 65 Discount yield Id= (1,000,000 - 993,750) x 360 1,000,000 65 = 3.4615% Bond equivalent yield Ibe = (1,000,000 - 993,750) x 365 993,750 65 = 3.5317% Effective annual return EAR = [ 1 + 3.5317% ]365/65 - 1 365/65 = 3.5833% 2. What is the discount yield, bond equivalent yield, and effective annual return on a 5 million Treasury bill that currently sells at 98.625 percent of its face value and is 136 days from maturity? Pf = Php5,000,000 P0 = Php5,000,000 (0.98625) = Php4,931,250 n = 136 Discount yield Id= (5,000,000 – 4,931,250) x 360 5,000,000 136 = 3.6397%

Bond equivalent yield

Ibe = (5,000,000 – 4,931,250) x 365 4,931,250 136 = 3.7417%

Effective annual return EAR = [ 1 + 3.7417% ]365/136 - 1 365/136 = 3.7858% 3. Calculate the bond equivalent yield and effective annual return on a negotiable CD that is 115 days from maturity and has a quoted nominal yield of 6.56 percent. Bond Equivalent Yield = Id x (365/360) = 6.56% x (365/360) = 6.6511% Effective Annual Rate = [ 1 + 6.6511% ]365/115 - 1 365/115 = 6.8038% 4. Calculate the bond equivalent yield and effective annual return on fed funds that are 3 days from maturity and have a quotes yield of 0.25 percent. Bond equivalent yield = Id x (365/360) = 0.25% x (365/360) = 0.2535% Effective Annual Rate = [1 + 0.2535% ]365/25 - 1 365/25 = 0.2538% 5. You would like to purchase a Treasury bill that has a 10,000 face value and is 68 days from maturity. The current price of the Treasury bill is 9,875. Calculate the discount yield on this Treasury bill. Discount yield Id= (10,000 – 9,875) x 360 10,000 68

= 6.6176% 6. Suppose you purchase a T-bill that is 125 days from maturity from 9,765. The T a face value of 10,000. a. Calculate the T-bill's quoted discount yield.

bill has

a. Calculate the T-bill's quoted discount yield. Discount yield Id= (10,000 – 9,765) x 360 10,000 125 = 6.768% b. Calculate T-bill's bond equivalent yield Bond equivalent yield Ibe = (10,000 – 9,765) x 365 9,765 125 = 7.0271% 7. You can purchase a T-bill that is 95 days from maturity from 9,965. The T-bill has a face value of 10,000. a. Calculate the T-bill's quoted yield Discount yield Id = (10,000 – 9,965) x 360 10,000 95 = 1.3263% b. Calculate the T-bill's bond equivalent yield Bond equivalent yield Ibe = (10,000 – 9,965) x 365 9,965 95 = 1.3495% c. Calculate the T-bill's EAR Effective Annual Rate = 1 + 1.3495% ]365/95 - 1 365/95 = 1.3562% 8. A T-bill that is 225 days from maturity is selling for 98,850 the T-bill has a face value of 100,000. a. Calculate the discount yield, bond equivalent yield and EAR on the T-bill, Discount yield

Id = (100,000 – 98,850) x 360 100,000 225 = 1.84% Bond equivalent yield Ibe = (100,000 – 98,850) x 360 98,850 225 = 1.8872%

Effective Annual Rate = 1 + 1.8872% ]365/225 - 1 365/225 = 1.8941%

b. Calculate the discount yield, bond equivalent yield and EAR on the T-bill if it matures in 300 days. Discount yield Id = (100,000 – 98,850) x 360 100,000 300 = 1.38% Bond equivalent yield Ibe = (100,000 – 98,850) x 365 98,850 300 = 1.4154%

Effective Annual Rate = 1 + 1.4154% ]365/225 - 1 365/225 = 1.4172% 9. If the overnight fed funds rate is quoted as 0.75 percent, what is the bond equivalent rate calculate the bond equivalent rate on fed funds if the quoted rate is 1.00 percent. a. Bond equivalent yield = Id x (365/360) = 0.75% x (365/360) = 0.7604% b. Bond equivalent yield = Id x (365/360)

= 1% x (365/360) = 1.0139%

10. The overnight fed funds rate on May 20,2016 was 0.37 percent. Compute the bond equivalent rate and the equivalent annual return on the fed funds as of May 20, 2016. Bond equivalent yield = Id x (365/360) = 0.37% x (365/360) = 0.3751%

Effective Annual Rate = 1 + 0.3751% ]365/1 - 1 365/1 = 0.3758%...