Question

4. You can purchase a T-bill that is 90 days from maturity for $9,900. The T-bill has a face value of $10,000. Calculate the T-bill's EAR. A) 4.00 percent. B) 4.16 percent. C)4.10 percent. D) 4.07 percent. E) 4.21 percent 5. A $5 million jumbo CD is paying a quoted 4.25% interest rate on 120-day maturity CDs. How much money could you withdraw at maturity if you invest in the CD? A) $5,000,000 B) $5,069,863 C) $4,929,167 D) $5,212,500 E) $5,070,833 X6. An investor is in the 41% tax bracket. For this investor a municipal bond paying 6% interest is equivalent to a corporate bond paying interest A) 11 790%

Answer 1

4. EAR for the T-bill purchased is calculated as follows :-

$\small \textrm{Expected Annual Return = }\frac{\textrm{(Face Value of T-bill - Cost of T-bill)*360 days}}{\textrm{90 days}}$

                                                    $\small \textrm{ = }\frac{\textrm{(10000 - 9900)*360 days}}{\textrm{90 days}}$

                                                    = 4% per annum

5. If one invests $ 5 million in CV then at maturity one gets the following amount :-

= 5 million + (5 million * 4.25 % * 120 days/ 360 days)

= 5,000,000 +70,833

= $ 5,070,833.