Question

(a) To buy a Treasury bill (T-bill) that matures to $10,000 in 6 months, you must pay $9750. What rate does this earn? (b) If the bank charges a fee of $40 to buy a T-bill, what is the actual interest rate you earn?
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Answer 1

Given:

To buy a Treasury bill (T-bill) that matures to $10,000 in 6 months, you must pay $9750.

To Find:

(a) What rate does this earn?

(b) If the bank charges a fee of $40 to buy a T-bill, what is the actual interest rate you earn?

​Solution:

Before solving the question we should know the formula for the interest which will be,

$I=\frac{PRT}{100}$

where,

          I= interest

          P= Principal amount

          R= rate of interest

          T=period

(a) To buy a Treasury bill (T-bill) that matures to $10,000 in 6 months, we must pay $9750 means that we are earning an interest of $250 in 6 months, so we can find the value of the rate of interest will be,

$250=\frac{9750*R*1}{100*2}\\R=5.13\%$

Hence, the rate of interest is 5.13%.

(b)  If the bank charges a fee of $40 to buy a T-bill, then the interest earned will be 250-40=210

$210=\frac{9790*R*1}{100*2}\\R=4.3\%$

Hence, the rate of interest is 4.3%.