Question

Calculate the effective annual interest rate for the following: a. A 3-month T-bill selling at $97,050 with par value $100,000. (Round your answers to 2 decimal places.) Effective annual rate b. A 12% coupon bond selling at par and paying coupons semiannually. (Round your answers to 2 decimal places.) Effective annual rate

Answer 1

Part A:

Int rate per 3 Months = [ FV / PV ] - 1

= [ 100000 / 97050 ] - 1

= 1.0304 - 1

= 0.0304

EAR = [ (1 + r )^n ] - 1

= [ ( 1 + 0.0304 )^4 ] - 1

= (1.0304^4) - 1

= 1.1272 - 1

= 0.1272 i.e 12.72%

Part B:

EAR = ( 1 + r)^n - 1

= ( 1 + 0.06)^2 - 1

= 1.06^2 - 1

= 1.1236 - 1

= 0.1236 i.e 12.36%