Question

The given treasury bill was sold in april of this year. find (i) the price of the t-bill, and (ii) the actual interest rate paid by the treasury. round dollar amounts to the nearest cent and interest rates to the nearest thousandth. six-month $17,000 t-bill with discount rate 0.130%

Answer 1

The bond's price will be lower than its face value when its interest rate is below the market rate; the price is determined by discounting future payments at the current market rate, resulting in a maximum price equal to an alternative investment that provides the same future value.

Step-by-step explanation:

When a bond's interest rate is less than the market interest rate, the bond's price tends to be lower than its face value. To calculate the price of a bond in such a scenario, we use present value calculation methodologies that discount the bond's expected future payments at the current market interest rate. In the instance where a bond with expected payments of $1,080 (including final interest payment and principal repayment) one year from now, and market interest rates are at 12%, we could use an alternative investment to receive $1,080 after one year by investing $964 now (since $964 × (1 + 0.12) = $1,080). Therefore, in a competitive market, an investor would not pay more than $964 for the bond to earn the equivalent return as the alternative investment.