Question

The Treasury Department auctioned $15 billion in 3-month bills in denominations of $10,000 at a discount rate of 3.750%.

What would be the effective rate of interest? (Use calendar year. Do not round intermediate calculations. Round your answer to the nearest hundredth percent.)

Answer 1

A useful formula for finding the effective rate on discounted notes is
.. (effective rate) = r/(1 -rt)
For t=(3 months)/(12 months) = 1/4, the effective rate on these bills is
.. (effective rate) = 3.75%/(1 -0.03750*0.25) ≈ 3.79%