Pricing Money Market Securities - Finance - Lecture Slides, Slides of Finance

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Pricing Money Market Securities

– Treasury Bills

Treasury Bills

• Short-term obligations of government with an initial

term to maturity of one year or less

• Issued at a discount & mature at face value
• The difference between the issue price and the face

value is treated as interest income (for tax purposes in

Canada)

• To calculate the price of a T bill, use the following

formula:

1

T Bill

F P n BEY B

=  

• (^)    

Pricing Treasury Bills

Where: P = market price of the T Bill F = face value of the T Bill BEY = the bond equivalent yield n = the number of days until maturity B = the annual basis (365 days in Canada)

Solving for Yield on a T Bill

• To solve for the yield on a T bill, rearrange the previous

formula and solve for BEY.

• Example : What is the yield on a $100,000 T bill with 180

days to maturity and a market price of $98,200?

F P B

BEY

P n

Pricing Treasury Bills