BUS 249 Finance

Question

Sixty days ago, Lucas invested $150,000 in a 200-day T-bill at a prevailing interest rate of 5%. Today, with the rate having dropped to 4.6%, Lucas decides to sell the bond. Given these changes, what interest rate did Lucas earn over the 50-day holding period?

Answer 1

First I want to address the error in the question. The question starts with 60 days but the final question is 50 days. I'm going to assume the both numbers should be 60 days.

So let's fine the total amount of interest earned if we held the bond a full year:

$150,000 * 5% = $7500

Now we apply the interest only the the days it was earned:

$7500 * 60/365 days = $1232.88

Now take that interest and divide it by your principle amount

$1232.88 / $150,000 = .82%

Lucas earned .82% interest while holding the T-Bill