Calculating HPY of T-Bill

CFA Level I Fixed Income
#1

All,

I am reading about T-bill. I am not sure what mistake I am doing for calculating HPY.

A 180-day T-bill is quoted at a discount rate of 2% for the 180-day period. Calculate 180-day return (HPY).

Here’s what I did: r = (D/F) * (360/t) => D = 10; Therefore, it is priced at 1000-10 = 90. HEnce, HPY = (1000-990)/990 = 1.01%.

However, the answer fpr 180-day return is 2.041% Can someone please explain what I am missing? I calculated that I will get a correct answer if Price = 980. That means D should be 20. I am not sure how this is possible.

Any thoughts?

#2

It appears that the meant that the discount was 2% of the face, or $20, giving a price of $980.

Was the 2% described as a discount, or a _discount yield _? Whacking big difference there.

#3

Hello S2000magician,

Yes, they have indeed quoted 2% discount yield. Can you please explain the difference? I thought 2% discount yield = (D/F)*(360/t) = Discount rate.

Any thoughts?

Thanks in advance.

#4

My thoughts are one: they’re wrong.

What you did is correct given the information: a 2% discount yield is 2% per year.

What they meant was that it was selling at a 2% discount to the face value; i.e., at 98% of face value.

They blew it.

#5

Thank you S2000magician

#6

You’re welcome again.