Answer to Question #122208 in Macroeconomics for Joby George

Question

Suppose the current interest rate is 5% what price should one expect to pay for a $1000 treasury bill, due to mature in one year, which had originally been sold when interest rate was 10%?

Answer 1

Original interest rate for the treasury bills = 10%

Treasury bills = $1000

Time = 1 year

Initial price for purchasing treasury bills when interest rate was 10%

=(10/110) x 1000

=$90.91

Initial price will then be =$(1000-90.91)

=$909.09

When the current interest rate is 5%, the purchasing price for treasury bills will then be;

=(5/105) x 1000

=$47.62

Therefore, the current price for purchasing treasury bills will be;

=$(1000-47.62)

=$952.38