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When the U.S government borrows money on a short-term basis (a years or less), it does...

When the U.S government borrows money on a short-term basis (a years or less), it does so by selling what are called Treasure bills, or T-bills for short. A T-bill is a promised by the government to repay a fixed amount at some time in the future – for example, 3 months or 12 months. Treasury bills are pure discount loans, If a T-bill promises to repay $10,000 in 12 months and the market interest rat0 is 7 percent. How much will the bill sell for in the market?

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Answer #1

Price of T-bill = Price of T-bill / (1+ discount rate) ^t

Where,

Par value of T-bill (maturity amount) = $10,000

Price of T-bill =?

Time to maturity t = 12 months or 1 year

Discount rate of T-bill = 7 %

Therefore,

Price of T-bill = $10,000/ (1+7%) ^1

Or P = $9345.79

The T-bill will sell for $9345.79 in the market

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