Treasury Bills At auction on August 18, 2005, 3-month...

Treasury Bills At auction on August 18, 2005, 3-month T-bills were sold at a discount of $3.470 \%$. What was the simple annual yield? (As of 2021, T-bill rates were still as low as they had fallen to during the 2008 financial crisis.)

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Key Concepts

Annualization of Returns

Annualization is the process of converting a return earned over a short period into an annual rate. This allows comparisons with other annual performance metrics by adjusting for the time period over which the return was actually earned.

Treasury Bills

Treasury bills are short?term government debt securities issued at a discount and redeemed at face value upon maturity. They do not pay periodic interest but instead generate a return based on the difference between the discounted purchase price and the face value at maturity.

Discount Yield

The discount yield is a measure of return based on the difference between the face value of the security and its purchase price, expressed as an annualized percentage of the face value. This metric is typically used for instruments sold at a discount, such as treasury bills.

Simple Annual Yield

The simple annual yield calculates the annualized rate of return based on the actual investment (purchase price) rather than the face value. It converts the return earned over a period shorter than a year into an equivalent annual rate, providing a straightforward measure of yield for short-term instruments.

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