The following are U.S. Treasury Bill quotes (bank discount rates) by dealers in U.S. government securities reported in Barron's for trading on the secondary market on Friday, January 25, 2013: Maturity Days to Maturity Bid Asked Asked Yield July 18, 2013 174 0.105% 0.095% 0.096% Consider the above T-bill.
a. Write the equation for investment yield as a function of the bank discount yield. Will the investment yield always be greater than the bank discount yield? Why?
b. Calculate the price corresponding to the bid and the price corresponding to the asked above (report the prices as a percent of face value). Which price is higher? Why does this make sense?
c. Suppose that the dealer simultaneously purchases and sells $5,000,000 face value T-bills maturing on July 18, 2013. How much does the dealer pay for the securities she purchases? How much does the dealer receive for the securities she sells? What is the dealer's profit?
d. The asked yield is the investment yield corresponding to the dealer's asked price. Why does it make sense that the ask yield is reported, rather than the bid yield?