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##### Treasuary bills have a fixed value

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**Question**

Treasuary bills have a fixed value (say $1000) and pay interest by selling at a discount. I.E. a one year bill with a $1000 face value sells today for $950, it willl pay $1000-$950=$50 an interest over its life. The interest rate on the bill is therefore $50/$950=0.0526, or 5.26 %.;a) suppose the price of the treasuary bill falls to $925. What happens to the interest rate?;b)suppose, instead that the price rises to $975. What is the inerest rate now?;c) NOW generalize this exapmle. Let P be the price of the bill and r the interest rate. Develop an algebraic formula expressing r in the terms of P.;(the interest earned is $1000-P. what is the % interest rate?)Show that this formula illustrates the point: HIGHER BOND PRICES MEAN LOWER INTEREST RATES.

Paper#28480 | Written in 18-Jul-2015

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