a).
First, purchase price will be calculated.
Face value = 1,000,000
Yield rate = 6.95%
Time = 60 days
Face value=1,000,000
Discounted amount=1,000,000×9.65%×36560
=11,424.66
Purchase price=Face value−Discounted amount
=1,000,000−11,424.66
=988,575.37
Time=20 days(60−40)
Yield on sale=6.5%
Sale price=1,000,000−(1,000,000×6.5%×36520)
=1,000,000−3,561.64
=996,438.36
Profit earned=Sale price−Purchase price
=996,438.36−988,575.34
=7,863.02
Hence profit is 7,863.02
(b)
Computation of interest:-
ProfitSimple interest=Amount invested×Rate×Time
7,863.02=988,575.34×Rate×36540
7,863.02=108,337.02×Rate
Rate=108,337.027,863.02
=0.07258 or 7.158%
Effective annual interest rate(EAR)
=(1+compound periodRate)compounding period−1
=(1+3650.07258)365−1
=(1+0.000199)365−1
=1.07533−1
=0.07533 or 7.533%
Simple interest is 7.158% and EAR is 7.533%
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