a. Suppose a U.S. Treasury bill, maturing in one year, can be purchased today for $91,500. Assuming that the security is held until maturity, the investor will receive $100,000 (face amount) but no interest. Determine the rate of return on this investment. (Hints: Since period is one year in a (and b), there are numerous ways of calculating the percentage return, including TVM, equations, and holding period return (HPR).)
b. Suppose a National Telephone and Telegraph (NTT) Company bond, maturing in one year, can be purchased today for $975. Assuming that the bond is held until maturity, the investor will receive $1,000 (principal) plus 7.5 percent (coupon) interest. Determine the rate of return on this investment.
c. Determine the implied risk premium on NTT bonds. (Hint: Risk premium is defined in Problem 3, and the Treasury bill is considered risk-free.)