Current market equilibrium-difference between the two yields

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Reference no: EM131022562

A) Suppose that, in the current market equilibrium, a 30-day treasury bill provides an annual yield of .5%, while 30-day commercial paper issued by Chipotle provides an annual yield of .75% (in both cases, the instrument pays out the principal and interest as a lump sum when they mature, at the end of the 30-days). Provide 2 possible reasons for the difference between the two yields (again, these should be rooted in ideas about asset pricing).

B) On the same day, a 6-month treasury bill provides an annual yield of 60 basis points, while a 6-month bond issued by Chipotle provides an annual yield of 100 basis points (again, assume that both instruments pay out the principal and interest as a lump sum when they mature and that the yields are determined by the current market equilibrium). Based on the 2 reasons you provided above, explain why the difference in the yields could be larger for the instruments that mature in 6-months vs. the instruments that mature in 1 month.

C) A one-year bond with a face value of $100 has a coupon rate of 5% per year? The bond returns the principal and interest (no compounding) at the end of 9 months. If I purchase the bond for $102, what is my annual yield? Show your calculations.

Reference no: EM131022562

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