What is the yield on a coupon equivalent basis (investment yield) for a 90-day Treasury bill selling for $960?
To find the yield on a coupon equivalent basis (investment yield) for a 90-day Treasury bill selling for $960, we need to calculate the discount yield. The formula to calculate the discount yield is: Discount Yield = (Face Value - Purchase Price) / Face Value * (360 / Days to Maturity). In this case:
- Face Value is typically $1,000
- Purchase Price is $960
- Maturity period is 90 days
Using the formula, we can calculate the discount yield as follows:
Discount Yield = (1000 - 960) / 1000 * (360 / 90) = 40 / 1000 * 4 = 0.04
Converting the decimal to a percentage, the discount yield or investment yield is 4%. Therefore, the yield on a coupon equivalent basis for the 90-day Treasury bill is 4%.
Understanding Discount Yield
Discount Yield Formula: Discount Yield = (Face Value - Purchase Price) / Face Value * (360 / Days to Maturity)
When calculating the yield on a coupon equivalent basis for a Treasury bill, we use the discount yield formula to determine the percentage return on investment. In this case, for a 90-day Treasury bill selling for $960, we substitute the values into the formula as explained above.
Interpreting the Calculation
Face Value: The assumed value of the Treasury bill, typically $1,000.
Purchase Price: The actual price at which the Treasury bill is bought, in this case, $960.
Maturity Period: The time remaining until the Treasury bill matures, which is 90 days.
By plugging these values into the formula, we find that the discount yield or investment yield for the 90-day Treasury bill is 4%.
Significance of Investment Yield
The investment yield, also known as the discount yield, provides investors with a measure of the return they can expect from purchasing a Treasury bill at a lower price than its face value. It helps investors evaluate the profitability of such short-term investments.
Therefore, understanding how to calculate and interpret the discount yield is essential for investors looking to make informed decisions about Treasury bill investments.