How to evaluate the 3-month Treasury bill that yield 2.5%? I think there could be 2 ways. Which is correct?
1. Simply use (1-0.025/12*3)*100 = 0.99375
2. Use the calculator to get the PV. But in this case though I know FV = 100, PMT = 0, but I don’t konw how to define N and I/Y for the 3-month Treasury bill.
I’m not sure which way I should use to evaluate the T-bill.
If the 2nd one is should be used, I’m don’t know how to define N and I/Y. But if the 1st one is the right choise, that would be different from the traditional evaluation method because it doesn’s exploit notion of time value of money.
Neither.
US T-Bills are quoted using a discount rate (with a 360-day year). Assuming that 3 months means 90 days, the price would be:
100 × [1 – 2.5% × (90/360)] = 99.375
Thanks. Is there any reason why not use the second one?
Yes: the TVM buttons on your calculator assume that interest rates are add-on rates, not discount rates. They won’t work for T-Bills.
wait, since 2.5% was the yield, not discount rate, you would get the same result by using FV=100, PMT=0, N=1, I/Y=2.5*0.25 —> PV=99.3788199
EDIT: well, not the same though. I remember know that it is always quote as discount yield/rate. So i was wrong