Dara Moralez

Financial Markets and Institutions

Ms. Cindy Thompson
Assignment #3
Due date: October 27, 2019
Question #1

The price of $8,000 face value commercial paper is $7,930. If the annualized discount rate
is 4%, when will the paper mature? If the annualized investment rate % is 4%, when will
the paper mature?

Using the discount rate @ 4%: Using the investment rate @ 4%:
Considering N, as the maturity of the paper Considering N, as the maturity of the paper
then: then:
(𝑃𝑉) 360
* 𝑑𝑎𝑦𝑠 (𝑁) = Discount rate 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 365
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 −1∗
𝑃𝑉 𝐷𝑎𝑦𝑠 (𝑁)
(8,000−7,930) 3600 = 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒
 * = 0.04
8,000 𝑁
8,000 365
70 360  −1∗ = 0.04
 ∗ = 0.04 8,000−7,930 𝑁
8,000 𝑁
8,000 365
360  −1∗ = 0.04
 (0.00875) ∗ = 0.04 70 𝑁
𝑁
365
360 1  114.286 – 1* = 0.04
 = 0.04 ∗ (0.00875) 𝑁
𝑁
365
360  113.286 * = 0.04
 = 0.04 ∗ 4.572 𝑁
𝑁
365
360  = 0.04 ∗ 113.286
 = 4.572 𝑁
𝑁
365
 360 = 4.572𝑁  = 4.53
𝑁


360
=
4.572𝑁  365 = 4.53𝑁
4.572 4.572
365 4.53𝑁
 78.74 = N  =
4.53 4.53

 N = 78.74 or 79 days  80.57 = N

  N = 80.57
Therefore, it will take the commercial paper  N = 80.57 or 81
79 days to mature at the discount rate of 4%. Therefore, it will take the commercial paper
about 81 days to mature at the investment rate
of 4%.
Question #2

Calculate the price of a 180-day T-bill purchased at a 10% discount rate if the T-bill has a
face value of $8,000.
# 𝑜𝑓 𝑑𝑎𝑦𝑠
Price = FV * [1- (discount rate * 360 )]
180
P = 8000 * [1 – (0.1 *360)]
P = 8000 * [1- (0.1 * 0.5)]
P = 8000 * (1 – 0.05)
P = 8000* 0.95
P = $7, 600

 Therefore, the price of the Treasury bill that has a discount rate of 10% and face value of
$8000 is $7,600.

Question #3
The annualized yield is 4% for 91-day commercial paper and 4.5% for 182-day commercial
paper. What is the expected 91-day commercial paper rate 91 days from now?
Expected 91-day commercial paper rate:
91 91 182
(1 + 4% 365) × (1 + 𝑅 365) = (1 + 4.5% 365)
91𝑅
 (1 + 0.00998) ∗ (1 + ) = (1 + 0.02244)
365
 1.00998 * (1 + 0.249R) = 1.02244
 1.00998 * 0.25R = 1.02244
 0.25R = 1.02244 – 1.00998
 0.25R = 0.01246
0.25𝑅 0.01246
 =
0.25 0.25
 R = 0.0489 *100
 R = 4.98% or 5%

 Therefore, the expected 91-day commercial paper rate 91 days from now is
approximately 5% (4.98%).