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FRM Part I · FRM Exam Part I · Pricing Conventions, Discounting, and Arbitrage

A 90-day Treasury bill with face value 100 is quoted at a bank discount rate of 4.80% (Actual/360 basis). What is its bond-equivalent yield, using a 365-day year and simple interest on the purchase price?

The bond-equivalent yield is about 4.93%. The bill's price is 98.80, so the 1.20 gain is earned on 98.80 rather than on face value. Scaling that 90-day return by 365/90 gives roughly 4.93%.

  1. A4.80%
  2. B4.86%
  3. C4.87%
  4. D4.93%Correct

Explanation

Price = 100 − 4.80 × 90/360 = 98.80. The gain is 1.20, so the yield is (1.20/98.80) × 365/90 = 4.93%. The 4.80% option is the discount rate. The 4.86% option is the money-market yield on a 360-day basis. The 4.87% option only rescales the discount rate by 365/360 and keeps face value as the base.

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