Question: Calculating Money Market Yields.
You are an analyst for a money market mutual fund that is considering whether to purchase T-bills. The manager of the fund is considering purchasing a 6-month (182-day), $10,000 par value T-bill that is currently selling for 98% of par. If purchased, the T-bill will be held until maturity.
1: Determine the annualized yield from investing in this T-bill. Show your calculations.
2: Determine the discount for this T-bill as well. Show your calculations.
3: The mutual fund that you work for is also thinking about investing in commercial paper. Determine the yield of a potential purchase of $1 million (par value) of 40-day commercial paper issued by GE Capital for a price of $996,800. Assume that a 360-day year is used. Show your calculations. Check figure: YCP = 2.89%.
4: Explain why a bank line of credit is necessary to back up an issue of commercial paper.