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The bank discount rate (ask) on a 71-day T-bill is 4.86%. What is the bond equivalent yield on...

Question:

The bank discount rate on a 71-day T-bill is 4.86%. What is the bond equivalent yield on the T-bill?

Bank Discount Rate and Bond Equivalent Yield:

The bank discount rate is (Par - Price) / (Par * 360 / Days to maturity). It is used for short term financial instruments and can be compared to discount rates of longer-term bonds. The bond equivalent yield (BEY) s calculated for short-term fixed income securities such as T-bills in order to determine a yield that is comparable to annual yields on bonds.

Answer and Explanation:

The bond equivalent yield is 4.975%.

Assume a $100,000 par value for the T-bill. The actual par value may be different and does not affect the...

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Government Securities: Definition, Types & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 12
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