Question

Assume that the original price of a three month treasury bill with a redeemable value of $100 was $99, and one month later it was sold for 599. What is the change in the rate of return on this bill? Round your answer below to 1 decimal place.

Answer 1

At the time of purchasing:

The bill is for 3 months.

There are 12 months is a year.

Rate of return = [(Redeemable value – Purchase price) / Purchase price] × (12/3) × 100

                        = [(100 – 99) / 99] × 4 × 100

                        = (1/99) × 4 × 100

                        = 400 / 99

                        = 4.04%

Once it is sold after 1 month:

The bill is for 2 months now.

There are still 12 months is a year.

Rate of return = [(Redeemable value – Purchase price) / Purchase price] × (12/2) × 100

                        = [(100 – 99) / 99] × 6 × 100

                        = (1/99) × 6 × 100

                        = 600 / 99

                        = 6.06%

Change in the rate = 6.06% - 4.04%

                              = 2.02%

                              = 2.0% (rounded to 1 decimal place)

Answer: 2.0