Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 252 views

    Treasury Bills: Getting The Price From The Interest Rate

    Uploaded by

    Anav Aggarwal
    Treasury bills are short-term debt securities issued by the U.S. government. They are considered very safe investments due to being backed by the full faith and credit of the U.S. government. Treasury bills are quoted at a discount to their face value and mature in periods of 4 weeks to 1 year. The document provides examples of how to calculate the price of a Treasury bill using the days to maturity and interest rate, as well as how discount yield is calculated using a formula.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Treasury Bills: Getting The Price From The Interest Rate

    Uploaded by

    Anav Aggarwal
    252 views2 pages
    Treasury bills are short-term debt securities issued by the U.S. government. They are considered very safe investments due to being backed by the full faith and credit of the U.S. government. Treasury bills are quoted at a discount to their face value and mature in periods of 4 weeks to 1 year. The document provides examples of how to calculate the price of a Treasury bill using the days to maturity and interest rate, as well as how discount yield is calculated using a formula.

    Original Title

    Numerical on T-Bill

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Treasury bills are short-term debt securities issued by the U.S. government. They are considered very safe investments due to being backed by the full faith and credit of the U.S. government. Treasury bills are quoted at a discount to their face value and mature in periods of 4 weeks to 1 year. The document provides examples of how to calculate the price of a Treasury bill using the days to maturity and interest rate, as well as how discount yield is calculated using a formula.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    252 views2 pages

    Treasury Bills: Getting The Price From The Interest Rate

    Uploaded by

    Anav Aggarwal
    Treasury bills are short-term debt securities issued by the U.S. government. They are considered very safe investments due to being backed by the full faith and credit of the U.S. government. Treasury bills are quoted at a discount to their face value and mature in periods of 4 weeks to 1 year. The document provides examples of how to calculate the price of a Treasury bill using the days to maturity and interest rate, as well as how discount yield is calculated using a formula.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Treasury

     bills  
     
    Treasury  bills  are  among  the  safest  investments  in  the  market.  They're  backed  
    by  the  full  faith  and  credit  of  the  U.S.  government,  and  they  come  in  maturities  
    ranging  from  four  weeks  to  one  year.  When  buying  Treasury  bills,  you'll  find  that  
    quotes  are  typically  given  in  terms  of  their  discount,  so  you'll  need  to  calculate  
    the  actual  price.  
     
    Getting  the  price  from  the  interest  rate  
     
    To  calculate  the  price,  you  need  to  know  the  number  of  days  until  maturity  and  
    the  prevailing  interest  rate.  Take  the  number  of  days  until  the  Treasury  bill  
    matures,  and  multiply  it  by  the  interest  rate  in  percent.  Take  the  result  and  
    divide  it  by  360,  as  the  Treasury  uses  interest-­‐rate  assumptions  using  the  
    common  accounting  standard  of  360-­‐day  years.  
    Then,  subtract  the  resulting  number  from  100.  That  will  give  you  the  price  of  a  
    Treasury  bill  with  a  face  value  of  $100.  If  you  want  to  invest  more,  then  you  can  
    adjust  the  figure  accordingly.  
    As  a  simple  example,  say  you  want  to  buy  a  $1,000  Treasury  bill  with  180  days  to  
    maturity,  yielding  1.5%.  To  calculate  the  price,  take  180  days  and  multiply  by  1.5  
    to  get  270.  Then,  divide  by  360  to  get  0.75,  and  subtract  100  minus  0.75.  The  
    answer  is  99.25.  Because  you're  buying  a  $1,000  Treasury  bill  instead  of  one  for  
    $100,  multiply  99.25  by  10  to  get  the  final  price  of  $992.50.  
    Keep  in  mind  that  the  Treasury  doesn't  make  separate  interest  payments  on  
    Treasury  bills.  Instead,  the  discounted  price  accounts  for  the  interest  that  you'll  
    earn.  For  instance,  in  the  preceding  example,  you'll  receive  $1,000  at  the  end  of  
    the  180-­‐day  period.  Because  you  only  paid  $992.50,  the  remaining  $7.50  
    represents  the  interest  on  your  investment  over  that  time  frame.  
     
     
    Discount  yield  is  calculated  as  and  the  formula  uses  a  30-­‐day  month  and  360-­‐day  
    year  to  simplify  the  calculation.  

     
    Discount  Yield      =        Par  value  –  purchase  value            X                              360  
     
                                                                                                   Par  value                                                                        Days  to  maturity  
     
     
    1) Assume,  for  example,  that  an  investor  purchases  a  $10,000  Treasury  bill  
    at  a  $300  discount  from  par  value  (a  price  of  $9,700),  and  that  the  
    security  matures  in  120  days.  In  this  case,  the  discount  yield  is  ($300  
    discount)[/$10,000  par  value]  *  360/120  days  to  maturity,  or  a  9%  
    dividend  yield.  
     
    2) For  example,  a  26-­‐week  T-­‐bill  is  priced  at  $9,800  on  issuance  to  pay  
    $10,000  in  six  months.  No  interest  payments  are  made.  The  investment  
    return  comes  from  the  difference  between  the  discounted  value  originally  
    paid  and  the  amount  received  back  at  maturity,  or  $200  ($10,000  -­‐  
    $9,800).  In  this  case,  the  T-­‐bill  pays  a  2.04%  interest  rate  ($200  /  $9,800  
    =  2.04%)  for  the  six-­‐month  period.  In  other  words,  you  would  pay  $9,800  
    for  the  T-­‐Bill  and  get  $10,000  back  ($9,800  principal  +  $200  interest)  in  
    six  months.  
     

    3) Let's  say  you  want  to  buy  a  one-­‐month  (aka  28-­‐day  or  4-­‐week),  $1,000  T-­‐
    bill  with  an  annualized  interest  rate  of  2.098%.  We  can  figure  it  like  this:  

    $1,000  x  0.02098  =  $20.98  interest  paid  per  year  

    Of  course,  since  it's  just  a  one  month  T-­‐bill,  we'd  take  that  annual  amount  
    and  divide  by  12:  

    =  $20.98  /  12  months  =  $1.75  interest  in  one  month  for  $1,000  invested  

    However,  rather  than  receiving  interest  on  your  investment,  you  would  
    simply  buy  the  T-­‐bill  at  a  discounted  price  of  $998.25  ($1,000  -­‐  $1.75  
    interest)  and  redeem  the  bill  at  the  end  of  the  one-­‐month  maturity  term  
    for  the  full  $1,000.  

    4)  
    5)  
     
     

    You might also like