Chapter 11

The Money Markets

Quantitative Problems
1. What would be your annualized discount rate % and our annualized investment rate % on the
purchase of a 182-day Treasury bill for $4,925 that pays $5,000 at maturity?
$5,000 $4,925 360
Solution: Discount Rate    0.02967  2.967%
$5,000 182
$5,000  $4,925 365
Investment Rate    0.03054  3.054%
$4,925 182

2. What is the annualized discount rate % and your annualized investment rate % on a Treasury bill that
you purchase for $9,940 that will mature in 91 days for $10,000?
$10,000  $9,940 360
Solution: Discount Rate    0.02374  2.374%
$10,000 91
$10,000  $9,940 365
Investment Rate    0.02421  2.421%
$9,940 91

3. If you want to earn an annualized discount rate of 3.5%, what is the most you can pay for a 91-day
Treasury bill that pays $5,000 at maturity?
$5,000  A 360
Solution:   .035 $5,000  A  44.24
$5,000 91
A  $4,955.76

4. What is the annualized discount rate % and investment rate % on a Treasury bill that you purchase
for $9,900 that will mature in 91 days for $10,000?
$10,000  $9,900 360
Solution: Discount Rate    0.03956  3.956%
$10,000 91
$10,000  $9,900 365
Investment Rate    0.04052  4.052%
$9,900 91

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

 Chapter 11 The Money Markets  59

5. The price of 182-day commercial paper is $7,840. If the annualized investment rate is 4.093%, what
will the paper pay at maturity?
Solution: Let B  what will be paid at maturity
[( B  $7,840) / ($7,840)]  (365 / 182)  0.04093
[( B  $7,840) / ($7,840)]  2.0055  0.04093
( B  $7,840)  2.0055  320.89
B  $7,840  160
B  $8,000

6. How much would you pay for a Treasury bill that matures in 182 days and pays $10,000 if you
require a 1.8% discount rate?
Solution: Let C  what you would pay
[($10,000  C ) /($10,000)]  (360 /182)  0.018
[($10,000  C ) /($10,000)]  1.978  0.018
[($10,000  C )]  0.018  $10,000  1.978
$10,000  C  91
C  $9,909

7. 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?
Solution: Let N  when the paper matures
Discount Rate:
[($8,000  $7,930) / $8,000)]  (360 / N )  0.04
($70 / $8,000)  (360 / N )  0.04
($0.00875)  (360 / N )  0.04
(360 / N )  0.04  (1/ $0.00875)
(360 / N )  4.571429
N  78.75  79days
Investment Rate:
[($8,000  $7,930) /($7,930)]  (365 / N )  0.04
($70 / $7,930)  (365 / N )  0.04
(365 / N )  0.04  (1/ 0.008827)
365 / N  4.53155
N  80.55  81days

8. How much would you pay for a Treasury bill that matures in one year and pays $10,000 if you
require a 3% discount rate?
60  Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition

Solution: Let C  what you would pay

[$10,000  C ) /($10,000)]  (360 /182)  0.03
[($10,000  C ) /($10,000)]  0.03  (182 / 360)
$10,000  C  151.67
C  $9,848.33

9. The annualized discount rate on a particular money market instrument is 3.75%. The face value is
$200,000 and it matures in 51 days. What is its price? What would be the price if it had 71 days to
maturity?
Solution: Let B  the price with 51 days to maturity
[($200,000  B) / ($200,000)]  (360 / 51)  0.0375
[($200,000  B)  (360 / 51)  0.0375  $200,000
($200,000  B)  (360 / 51)  $7,500
($200,000  B)  $7,500  (51 / 360)
$200,000  B  $1,062.50
B  $198,937.50
If 71 days to maturity, then B  $198,520.83.
10. The annualized yield is 3% for 91-day commercial paper and 3.5% for 182-day commercial paper.
What is the expected 91-day commercial paper rate 91 days from now?
Solution: Let A  the expected 91-day rate, 91 days from now.
Assume that the 182-day rate is the average of the current 91-day rate and the expected
91-day rate.
(3  A) / 2  3.5
3 A  7
A4

11. In a Treasury auction of $2.1 billion par value 91-day T-bills, the following bids were submitted:

Bidder Bid Amount Price

1 $500 million $0.9940
2 $750 million $0.9901
3 $1.5 billion $0.9925
4 $1 billion $0.9936
5 $600 million $0.9939
 Chapter 11 The Money Markets  61

If only these competitive bids are received, who will receive T-bills, in what quantity, and at what price?
Bidders 1, 4, and 5 will receive T-bills in the amount requested all at .9936.

12. If the Treasury also received $750 million in non-competitive bids, who will receive T-bills, in what
quantity, and at what price?
Solution: All competitive bids are accepted at the highest yield paid to competitive bids. Thus, all
$750 million will be accepted at .9936.