Discuss the differences between the Bank Discount Method and Bond-Equivalent Yield when pricing U.S. Treasury Securities. Use Figure 2.1 on page 30 to give an example of the pricing for the security that matures on February 20, 2020.
FIGURE 2.1 Treasury bill listings Saore 1wal sime foumal Onliec Sententer 3, 2019. be purchased for $10,000(1.00519)=$9,948.11. Similarly, with a bid yield of 1.878%. a dealer would be willing to purchase the bill for $10,000(1.01878100/360)= \$9,947.83. Because prices and yields are inversely related, the higher bid yield reported in Figure 2.1 implies a lower bid price. The bank discount method for computing yields has a long tradition, but it is flawed for at least two reasons. First, it assumes that the year has only 360 days. Second, it computes the yield as a fraction of face value rather than of the price the investor paid to acquire the bill.' An investor who buys the bill for the asked price and holds it until maturity will see her investAnnualizing this days by a multiple of $10,000/$9,948.11=1.005216, for a gain of .5216% which, aside from this a using a 365-day year results in a yield of .5216%365/100=1.904% 3 decimal places), is the rounding error (due to the fact of .5216%365/100=1.904 that yields are reported to only is called the Treasury bill's bone repted in the last column, under "esked yield are reported to certificate of deposit - Certificates of Deposit A bank time deposit. "dertificate of deposit (CD) is a time deposit with a bank. Time deposits (in contrast t intland deposits" or checkin is a time deposit with a bank, Time deposits (in contrist than $100,000 are us to the depositors) may not be withdrawn on demand. The bank py) ketable, although the cash in the CDs are treated FIGURE 2.1 Treasury bill listings Saore 1wal sime foumal Onliec Sententer 3, 2019. be purchased for $10,000(1.00519)=$9,948.11. Similarly, with a bid yield of 1.878%. a dealer would be willing to purchase the bill for $10,000(1.01878100/360)= \$9,947.83. Because prices and yields are inversely related, the higher bid yield reported in Figure 2.1 implies a lower bid price. The bank discount method for computing yields has a long tradition, but it is flawed for at least two reasons. First, it assumes that the year has only 360 days. Second, it computes the yield as a fraction of face value rather than of the price the investor paid to acquire the bill.' An investor who buys the bill for the asked price and holds it until maturity will see her investAnnualizing this days by a multiple of $10,000/$9,948.11=1.005216, for a gain of .5216% which, aside from this a using a 365-day year results in a yield of .5216%365/100=1.904% 3 decimal places), is the rounding error (due to the fact of .5216%365/100=1.904 that yields are reported to only is called the Treasury bill's bone repted in the last column, under "esked yield are reported to certificate of deposit - Certificates of Deposit A bank time deposit. "dertificate of deposit (CD) is a time deposit with a bank. Time deposits (in contrast t intland deposits" or checkin is a time deposit with a bank, Time deposits (in contrist than $100,000 are us to the depositors) may not be withdrawn on demand. The bank py) ketable, although the cash in the CDs are treated
