Answer:
(a) The effective annual interest rate for a 3-month T-bill selling at $97,270 with par value $100,000 is 11.71%
(b) The effective annual interest rate for a 13% coupon bond selling at par and paying coupons semiannually is 13.42%
Explanation:
(a) A 3-month T-bill selling at $97,270 with par value $100,000
EAR =[tex][par value /price]^n-1}[/tex]
n = 3 months or 12/3 = 4 times in a year
= [tex][100,000/97,270]^4 - 1[/tex]
=[tex][1.028066]^4 -1[/tex]
= 1.1171 - 1
= .1171 or 11.71%
b) EAR(coupon bond) = [tex][1+.13/2]^2 -1[/tex]
=[tex][1+.065]^2 -1[/tex]
= [tex][1.065]^2 -1[/tex]
= 1.1342 - 1
= .1342 or 13.42%
