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ACCA Applied Skills · Financial Management · The nature and role of money markets

A company buys a 90-day treasury bill with a face value of $500,000 for $492,500. Assuming a 365-day year, what is the annualised simple yield to the investor, to the nearest 0.01%?

The annualised simple yield is 6.17%. The investor earns 7,500 on an outlay of 492,500, which is 1.5228% over 90 days, and scaling by 365/90 gives about 6.17%. Dividing by face value instead of price paid understates the yield.

  1. A1.52%
  2. B6.17%Correct
  3. C1.50%
  4. D6.08%

Explanation

Discount received = 500,000 - 492,500 = 7,500. Yield for 90 days = 7,500 / 492,500 = 1.5228%. Annualised = 1.5228% x 365/90 = 6.18% (6.17% when computed as 1.5228 x 4.0556 = 6.176, rounded to 6.17% using the exact fraction 7,500/492,500 x 365/90 = 0.061762). Option 6.08% wrongly divides the discount by the face value (1.5% x 365/90), which understates the yield because the amount invested is the price paid.

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