Treasury bills have a fixed face value (say, $1,000) and pay interest by selling at a discount. for example, if a one-year bill with a $1,000 face value sells today for $950, it will pay $1,000 $950 $50 in inter- est over its life. the interest rate on the bill is there- fore $50 $950 0.0526, or 5.26 percent. a. suppose the price of the treasury bill falls to $925. what happens to the interest rate? b. s uppose, instead, that the price rises to $975. what is the interest rate now? c. (more difficult) now generalize this example. let p be the price of the bill and r be the interest rate. develop an algebraic formula expressing r in terms of p. ( hint: the interest earned is $1,000 − p . what is the percentage interest rate? ) show that this formula illustrates the point made in the text: higher bond prices mean lower interest rates.
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Treasury bills have a fixed face value (say, $1,000) and pay interest by selling at a discount. for...
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