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Question 4 (10 Pints)

4. (a) If a six-month Treasury bill is purchased for $0.9325 on a dollar (i.e., $93,250 for a $100,000 bill), what is the discount yield, the annual rate of interest, and the compound rate? What will these yields be if the discount price falls to $0.9045 on a dollar (i.e., $90,450 for a $100,000 bill)? (5 points)

(b). An investor is in the 32 percent income tax bracket and can earn 4.3 percent on a nontaxable bond. What is the comparable yield on a taxable bond? If this same investor can earn 7.2 percent on a taxable bond, what must be the yield on a nontaxable bond so that the after-tax yields are equal? (5 Points)