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# Answer to Question #191264 in Finance for Animesh Gautam

Question #191264

XYZ funds purchased a bank bill (face value=1 million) on 10th June 2020. The bill will mature in 60 days and the yield is 6.95%. After holding the bill for 40 days, the funds sold the bill at a yield of 6.5%.

a) Calculate the profit through buy and sell of this bank bill. (4.5 marks)

b) Work out the simple annual interest rate and effective annual interest rate earned by XYZ.(4 marks)

1
2021-05-11T14:16:00-0400

a).

First, purchase price will be calculated.

Face value = 1,000,000

Yield rate = 6.95%

Time = 60 days

"Face\\space value=1,000,000"

"Discounted\\space amount=1,000,000\\times9.65\\%\\times\\frac{60}{365}"

"=11,424.66"

"Purchase\\space price=Face\\space value-Discounted\\space amount"

"=1,000,000-11,424.66"

"=988,575.37"

"Time=20\\space days(60-40)"

"Yield\\space on\\space sale=6.5\\%"

"Sale\\space price=1,000,000-(1,000,000\\times 6.5\\%\\times\\frac{20}{365})"

"=1,000,000-3,561.64"

"=996,438.36"

"Profit\\space earned=Sale\\space price-Purchase\\space price"

"=996,438.36-988,575.34"

"=7,863.02"

Hence profit is "7,863.02"

(b)

Computation of interest:-

"\\frac{Simple\\space interest}{Profit}=Amount\\space invested\\times Rate\\times Time"

"7,863.02=988,575.34\\times Rate \\times\\frac{40}{365}"

"7,863.02=108,337.02\\times Rate"

"Rate=\\frac{7,863.02}{108,337.02}"

"=0.07258\\space or\\space 7.158\\%"

"Effective\\space annual\\space interest\\space rate(EAR)"

"=(1+\\frac{Rate}{compound\\space period})^{compounding\\space period}-1"

"=(1+\\frac{0.07258}{365})^{365}-1"

"=(1+0.000199)^{365}-1"

"=1.07533-1"

"=0.07533\\space or\\space 7.533\\%"

Simple interest is 7.158% and EAR is 7.533%

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