A $10,000 Treasury bill has a bank discount yield of 6.81% based on the ask price and 6.90% based on the bid price. The maturity of the bill (already accounting for skip-day settlement) is 60 days.

1. Find the bid price of the Treasury bill.

 

2. Find the ask price of the Treasury bill.

 

3. Calculate the bond equivalent yield on the ask price.

 

4. Calculate the effective annual yield on the ask price.

 

5. Which of the following securities offers a higher effective annual yield?

1. A 3-month bill selling at $9,764
2. A 6-month bill selling at $9,539

6. An investor is in a 28% tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds?

7. Which security should sell at a greater price?

1. A 10-year Treasury bond with a 9% coupon rate.
2. A 10-year Treasury bond with a 10% coupon rate.

8. Which security should sell at a greater price?

1. A 3-month T-bill with a discount yield of 6.1%.
2. A 3-month T-bill with a discount yield of 6.2%.

9. Which security should sell at a greater price?

1. A 3-month maturity call option with an exercise price of $40.
2. A 3-month maturity call option with an exercise price of $35.

10. What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?

1. The spread would decrease.
2. The spread would increase.
3. The spread would remain the same.
4. The spread could either increase or decrease, all else being equal.