A 3-month T-bill with a maturity value of $1,000 is just a piece of paper that entitles the holder to $1,000 in three months. For example, if you were to buy a 3-month T-bill on September 24, 2008, with a maturity value of $1,000 and 90 days left to maturity, the U.S. government would pay you $1,000 on December 23, 2008. In general, the price of a bond is less than its maturity value. That is, if you are going to give up a certain amount of money for the duration of the bond, you expect to be paid for this loss of liquidity and compensated for inflation that could reduce the value of the repayment at the end of the period. Therefore, a piece of paper entitling you to $1,000 on December 23 would usually be worth less than $1,000 on September 24. The yield on a bond is a function of the percent by which your money implicitly grows while invested in it. In order to compare yields among bonds, yield is always reported as an annual interest rate. A bond's yield is a function of its maturity value (M), its price (PB), and the number of days until it matures. The general formula for the yield on a zero-coupon bond such as a T-bill is as follows: Percentage Yield = 100 x M-PR M × 360 Days to Maturity For example, if you were to pay $995 for a T-bill maturing in 90 days with a face value of $1,000, the percentage yield would be calculated as follows: Percentage Yield = 100 x $1,000-$995 360 100 x $1.000 × 4 $5 $1,000 100 x 0.005 x 4 =2% Calculate yields on 3-month T-bills for each of the prices in the following table and enter your results rounded to the nearest percent. Assume that all the T-bills have a maturity value (M) of $1,000. (Note: Be sure to use a negative sign if the yield is negative.) Price (PB) of a 3-Month T-Bill with 90 Days Left to Maturity 1,005.00 1,000.00 995.00 990.00 985.00 Yield % 0% 2% % % Based on the data from the previous table, use the black points (cross symbol) to plot the relationship between T-bill prices and their yields on the following graph. Be sure to plot from left to right. Line segments will automatically connect the points. YIELD ON 3-MONTH T-BILL (Percent) 6 5 -2 985 990 995 1000 1005 PRICE OF 3-MONTH T-BILL (Dollars) + T-Bill Price/Yield (?) Refer back to the points you plotted on the previous graph. The line showing the relationship between bond prices and bond yields has a slope; hence, there is ▼relationship between bond prices and interest rates. The implied yield on a bond becomes negative when its price to such a situation in the T-bill market? its maturity value. Which of the following events would most likely lead ○ The United States Treasury holds a large auction of T-bills, increasing the supply of T-bills in the market. The United States government is forced to shut down its offices for several months because Congress and the president cannot pass a budget. A massive decrease in investor confidence sharply increases the demand for T-bills. The increased demand causes T-bill prices to rise above their maturity values.