Treasury Bills In December 2008 (in the midst of the...

Treasury Bills In December 2008 (in the midst of the financial crisis) a $$\$ 5,000$$ 6-month T-bill was selling at a discount rate of only $0.25 \%$. ${ }^{\dagger}$ What was its simple annual yield?

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Key Concepts

Treasury Bills

Treasury bills are short-term debt securities issued by a government with maturities of one year or less. They are typically sold at a discount to their face value, and upon maturity, the holder receives the full face value. The difference between the purchase price and the maturity value represents the investor's earnings in the form of interest.

Discount Rate

The discount rate is the rate at which a treasury bill or other short-term security is sold below its face value. It represents the percentage discount applied to the face value and is used to determine the initial purchase price of the instrument. This rate, however, does not directly reflect the actual rate of return the investor earns, as it is calculated based on the face value rather than the purchase price.

Simple Annual Yield

The simple annual yield is a method of annualizing the return on an investment, particularly for instruments like treasury bills sold at a discount. It is calculated by taking the difference between the face value and the purchase price, dividing it by the purchase price, and then scaling that figure up to an annual basis. This yield provides a straightforward estimate of the investor’s return over a full year, without compounding effects.

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