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+1 vote
in BUS 2016H - Financial Mathematics by
During a Friday morning auctions for TB’s, you decide to bid for R20 million worth of 91-day TB’s. The date is 15th August 2014 and you decide that you wish to earn a yield of 10.60% p.a simple. 

Calculate the equivalent simple discount rate p.a Answer d = 10.327082%

1 Answer

+2 votes
by (3.2k points)

The answer is fairly simple and requires only a little thought.

We present value cashflows with the discount rate and can present value the same cashflows with the simple interest rate based on the assumption of no arbitrage.  Here are the equations below:

$$20m = Price(1+ 0.106*91/365) $$

$$Price = 19.485...m$$ Remember not to round but store values instead.

Lastly, by the no arbitrage assumption:

$$20m(1-d*91/365) = 19.485..m$$