If you purchase $27,000 in U.S. Treasury Bills with a discount rate of 4.2% for a period of 26 weeks, what is the effective interest rate? Round to the nearest hundredth percent.
If you purchase $27,000 in U.S. Treasury Bills with a discount rate of 4.2% for a period of 26 weeks, what is the effective interest rate? Round to the nearest hundredth percent.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
If you purchase $27,000 in U.S. Treasury Bills with a discount rate of 4.2% for a period of 26 weeks, what is the effective interest rate? Round to the nearest hundredth percent.
Step 1
The effective interest rate on a U.S. Treasury Bill, or T-Bill, is the actual interest rate on a loan to the government and takes into account the fact that the purchaser does not pay the full amount of the T-Bill. It is calculated using the interest, purchase price, and time.
The amount of interest on a T-Bill is calculated as follows where the discount rate is given as a decimal and the time will be a fraction whose numerator is the given amount of time in weeks and denominator is 52 weeks.
interest = face value ✕ discount rate ✕ time
The rate was given to be 4.2%. As a decimal, we have
4.2% = .
Calculate the interest (in $) for a $27,000 T-Bill with a discount of 4.2% for 26 weeks.
| interest | = | face value ✕ discount rate ✕
|
||
| = | $27,000 ✕ ✕
|
|||
| = | $ |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education