The treasurer of a large corporation wants to invest $24 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.87 percent; that is, the EAR for this investment is 3.87 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 98 days, what is the percentage discount yields on this investment

Question

Alberto Lang

Business

20 April, 20:53

The treasurer of a large corporation wants to invest $24 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.87 percent; that is, the EAR for this investment is 3.87 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 98 days, what is the percentage discount yields on this investment

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Answers (1)

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Haylie Rubio · Answer 1

Answer: 3.73%

Explanation:

We are given an EAR so first we'd have to convert it to an APR.

We do so by the following formula,

APR = [ (Ear + 1) ^ (1/n) - 1 ] x n

APR = ((3.87% + 1) ^ (1/365/98) - 1) x 365/98

APR = ((1.0387) ^ (98/365) - 1) x 365/98

APR = 3.816%

Now that we have the APR, we get the percentage discount yields by,

= ([360 (.03816) ] / [365 + (98) (.03816))

= 3.73%

The percentage discount yields on this investment is 3.73%