1.
What is the discount yield, bond yield, and effective annual return on a $1million
Treasury bill that currently sells at 97 3/8 percent of its face value and is 65 days
sells at maturity?
2. Suppose you purchase a T-bill that is 125 days from maturity for $9,765. The T-
bill has a face value of $10,000.
a. Calculate the T-bill’s quoted discount yield.
b. Calculate the T-bill’s bond equivalent yield.
3. You can buy commercial paper of a major US corporation for $495,000. The
paper has a face value of $500,000 and is 45 days from maturity. Calculate the
discount yield and bond equivalent yield on the commercial paper.
4. You can invest in taxable bonds that are paying a 9.5 percent annual rate of return
or a municipal bond paying a 7.75 percent annual rate of return. If your marginal
tax rate is 21 percent, which security should you buy? Hilton hotels corp has a
convertible bond issue outstanding. Each bond, with a face value of 1000 can be
converted into common shares at a rate of 61.2983 shares of stock per 1000 face
value bond ( the conversion rate), or $16.316 per share. Hilton’s common stock is
trading (on the NYSE) at $15.90 per share and the bonds are trading at $975.
a. Calculate the conversion value of each bond.
b. Determine if it is currently profitable for bond holders to convert their bonds
into shares of Hilton common stock.
5. Why are mortgage markets studied as separate capital market?
6. You plan to purchase a 100,000 house using a 30 year mortgage obtained from
your local credit union. The mortgage rate offered to you is 8.25 percent. You
will make a down payment of 20 percent of the purchase price.
a. Calculate your monthly payments on this mortgage.
b. Calculate the amount of interest and, separately principal paid in the 25th
payment.
c. Calculate the amount of interest and, separately principal paid in the 25th
payment.
d. Calculate amount of interest paid over the life of this mortgage.
7. What is mortgage sale? How does a mortgage sale differ from the securitization
of mortgage?
1. What is the discount yield, bond yield, and effective annual return on a
$1million Treasury bill that currently sells at 97 3/8 percent of its face value and is
65 days sells at maturity?
Face Value (F)= $1,000,000
Price =P= 97.375% of $1,000,000 = $973,750
Days to maturity=t= 65 days
Discount yield ={ (F-P)/F} x (360/t)
Discount yield= 14.54% ={(1000000-973750)/1000000} x (360/65)
Return over the next 65 days= 2.70% =(1000000/973750)-1
Effective annual return= 16.14% =(1+0.027)^(365/65)
Bond equivalent yield= (365 x Discount rate)/ (360- Discount ratex Days to
maturity)= 15.14% =(365 x 0.1454)/(360-0.1454x65)
2. Suppose you purchase a T-bill that is 125 days from maturity for $9,765. The
T-bill has a face value of $10,000.
a. Calculate the T-bill's quoted discount yield.
Face Value (F)= $10,000
Price =P= $9,765
Days to maturity=t= 125 days
Discount yield ={ (F-P)/F} x (360/t)
Discount yield= 6.77% ={(10000-9765)/10000} x (360/125)
b. Calculate the T-bill's bond equivalent yield.
Face Value (F)= $10,000
Price =P= $9,765
Days to maturity=t= 125 days
Bond equivalent yield ={ (F-P)/P} x (365/t)
Discount yield= 7.03% ={(10000-9765)/9765} x (365/125)
3. You can buy commercial paper of a major US corporation for $495,000. The
paper has a face value of $500,000 and is 45 days from maturity. Calculate the
discount yield and bond equivalent yield on the commercial paper.
discount yield.
Face Value (F)= $500,000
Price =P= $495,000
Days to maturity=t= 45 days
Discount yield ={ (F-P)/F} x (360/t)
Discount yield= 8.00% ={(500000-495000)/500000} x (360/45)
bond equivalent yield.
Face Value (F)= $500,000
Price =P= $495,000
Days to maturity=t= 45 days
Bond equivalent yield ={ (F-P)/P} x (365/t)
Discount yield= 8.19% ={(500000-495000)/495000} x (365/45)
