For the following treasury bill bought in 2007 find a the pr

For the following treasury bill bought in 2007, find (a) the price of the T-bill, and (b) the actual interest rate paid by the Treasury. Nine-month $3,500 T-bill with discount rate of 3.04%

Solution

A.

Price of T-bill

P = $3500

r = 3.04% = 0.0304

t = 9/12 = 0.75

discount = P*r*t

= 3500*0.0304*0.75 = $79.8

Price of T-bill = face value - discount

= 3500 - 79.8 = $3420.2

Part B.

actual interest rate

Amount of interest received = $79.8

t = 9/12 = 0.75

P = $3420.2

I = P*r*t

r = I/(P*t) = 79.8/(3420.2*0.75)

r = 0.0311 = 3.11%